Michael Nathanson on Netflix earnings: We were most surprised about the price increase
RIGHTS FEES. STOCK RIGHT NOW, YOU SEE IT THERE, NOT FAR FROM LEVELS IT FIRST REACHED I THINK MAYBE EIGHT YEARS AGO. UP TWO-THIRDS OF A PERCENT RIGHT NOW. >>> NETFLIX BEAT EARNINGS EXPECTATIONS AS THE STREAMING GIANT ADDED NEARLY 9 MILLION PAID SUBSCRIBERS HELPED BY ITS PASSWORD SHARING CRACKDOWN AND CHEAPER AD SUPPORTED TIER. THE COMPANY IS ALSO FLEXING ITS PRICING POWER, HIKING FEES ON SOME PLANS AS EARLY AS THIS WEEK. JOINING US NOW IS MICHAEL NATHANSON, PARTNER AND SENIOR RESEARCH ANALYST. MICHAEL, I WAS SAYING HERE ON SET DURING THE BREAK THERE IS FOUR THINGS THAT ARE
IMPORTANT WHEN YOU’RE THE PARENT OF A 20-YEAR-OLD. WHEN THEY COME OFF YOUR HEALTH INSURANCE, WHEN YOU STOP PAYING THEIR CELL PHONE, WHEN YOU STOP PAYING THE CAR INSURANCE AND WHEN YOU STOP SHARING YOUR NETFLIX PASSWORD WITH THEM. WHAT IS GOING ON HERE? AM I GOING TO NOT BE ABLE TO DO THIS ANYMORE? >> WELL, YOU’RE GOING TO BE ABLE TO DO IT, YOU HAVE TO PAY MORE TO DO IT, RIGHT? WHAT NETFLIX HAS DONE IS THEY SAID, THERE ARE 100 MILLION HOMES AROUND THE WORLD, WHERE PEOPLE SHARE PASSWORDS. WE HAVE DONE RESEARCH WITH PCH, IT
SAYS THE VAST MAJORITY OF SHARING ARE PARENTS AND CHILDREN. AND AT SOME POINT, YOUR KIDS ARE GOING TO BE OUTSIDE OF THE HOME AND HAVE
PASSWORD. THAT’S ALL WE EVER TALK ABOUT HERE. IT WOULD BE NICE IF THEY ASKED HOW I’M DOING ONCE AND A WHILE, BUT THEY REALLY JUST WANT THE PASSWORD. WE’RE HALFWAY THROUGH THE PROCESS. THE 9 MILLION SUBSCRIBERS THEY ADDED IN THE LAST QUARTER, HOW MANY OF THAT DO YOU THINK CAME FROM THE PASSWORD SHARING EFFORTS THERE? >> THEY HAVE NOT SAID, BUT, AGAIN, THE RESEARCH WE HAVE DONE WITH PCH JUST ABOUT 20%, 30% CONVERSION OF 100 MILLION. I WOULD SAY WE’RE PROBABLY ABOUT 10 MILLION OF THAT WAY THROUGH, RIGHT? SO BASICALLY YOU THINK 5 MILLION LAST
QUARTER, 5 MILLION THIS QUARTER, 5 AND 5. THAT’S HOW WE THINK ABOUT IT. THE COMPANY IS NOT SAYING. AND I THINK THE DQUESTION PEOPL HAVE IS 12 MONTHS FROM NOW THAT IS GOING TO HAPPEN TO THE CRACKDOWN, WILL IT START NOT MATTERING AT THAT POINT TO SUBSCRIBER GROWTH? >> AT SOME POINT, RIGHT, YOU DO LOSE SOME VIEWERS. DOES NETFLIX NOT CARE ABOUT THAT AT ALL? IT REALLY CARES ABOUT PAID SUBSCRIBERS? >> YES. WHAT THEY’RE COUNTING ON IS THAT NEW AD TIER, THE PRICE IS SO LOW THAT AT SOME POINT PEOPLE SAY, OKAY, WHAT ELSE IS
ON RIGHT NOW, FOR $6.99, I’LL TAKE THIS PRODUCT, IT IS CHEAPER TO THE OTHER OPTIONS. OPENING UP THAT PRICE POINT HAS GIVEN THEM MORE CONFIDENCE TO RAISE PRICES AND START PUSHING PEOPLE TOWARD PASSWORD SHARERS. THEY’LL CATCH PEOPLE WHO ARE PRICE SENSITIVE OR JUST ANGRY ABOUT PRICE HIKES. >> ONE MORE QUICK ONE, ARE YOU ULTIMATELY UPBEAT HERE ON THIS? IS THIS SOMETHING YOU THINK THERE IS ROOM TO GROW? AND THEY’RE GOING TO SURPRISE US AGAIN AND HOW SURPRISED WERE YOU WITH THE EARNINGS? >> THAT’S A GOOD QUESTION. WE’RE MOST SURPRISED ABOUT THE PRICE INCREASE, RIGHT? THEY
RAISED PRICES IN THE U.S., UK AND FRANCE PRETTY AGGRESSIVELY RIGHT NOW. THERE IS A STRIKE GOING ON. WE DIDN’T THINK THEY WOULD DO THAT UNTIL THE STRIKES WERE OVER. THAT WAS THE BIG A-HA FOR US, THEY’RE FLEXING THEIR PRICING MUSCLE. ON THE STOCK, THE STOCK REALLY GOT BRUSHED AFTER A CONFERENCE WITH THE CFO SPEAKING A MONTH AGO. IT IS BACK TO THE LEVEL WHERE IT WAS BEFORE. WE’RE NEUTRAL ON IT. WE THINK DISNEY, BECAUSE IT HAS BEEN ON EIGHT YEAR LOWS, THAT’S TO US THE NAME PEOPLE SHOULD BE LOOKING AT RIGHT NOW. IT REALLY JUST
HAS BEEN HAMMERED. THERE IS NO INVESTOR ATTENTION ALONE THERE. THAT TO US IS REALLY INTERESTING IDEA FOR THE NEXT 12 MONTHS. >> LET’S GET INTO THAT, BECAUSE THERE IS A LOT OF WAYS TO FRAME THE ESPN FINANCIALS THEY CAME OUT WITH ON A NINE-MONTH BASIS. IT WASN’T A BIG PRECIPITOUS DROP IN REVENUE AT ESPN. KIND OF BROADLY DEFINED. BUT HOW DO YOU THINK ABOUT DISNEY IN TERMS OF BEING ABLE TO BE AGNOSTIC ABOUT HOW PEOPLE CONSUME THEIR CONTENT AND ALSO THE OVERALL SPEND? ONE THING I’VE BEEN WONDERING ABOUT DURING THE STRIKES IS ARE ALL THE
COMPANIES COMING AROUND AND SAYING MAYBE WE DON’T NEED AS MUCH. MAYBE IN AGGREGATE WE DON’T HAVE TO GIVE AS MUCH NEW STUFF ALL THE TIME AND THEREFORE WE CAN KIND OF GET BY ON — IN A MORE PROFITABLE WAY ON STREAMING? >> I THINK IT IS A GREAT POINT. TO STEVE’S QUESTION ABOUT THE A-HA IN THE QUARTER, NETFLIX ONLY IS GOING TO SPEND $13 BILLION, ONLY $13 BILLION. WE THOUGHT THEY WOULD SPEND 15 WHEN THE YEAR STARTED. I THINK WHAT PEOPLE ARE MISSING ABOUT DISNEY, THEY OVERSPENT THE WAY NETFLIX DID TO BUILD THEIR BUSINESS. AND
NOW THEY’RE REALIZING PERHAPS WE COULD SPEND LESS, WE COULD STRETCH OUT SOME OF THE CONTENT, MAKE LESS REGIONAL CONTENT. AND I JUST THINK WHAT YOU’RE SEEING IS THE STRIKE MAY HAVE BEEN THE SILVER LINING IN THE SENSE THAT PEOPLE NOW REALIZED THEY COULD SLOW DOWN THEIR CONTENT SPENDING, RIGHT? AND START TO DRIVE MARGIN. ALSO, THEY CAN DRIVE PRICING BECAUSE THERE IS AD TIERS. I THINK FOR DISNEY, THE OPPORTUNITY IS REALLY ABOUT THEIR STREAMING PROFITABILITY, NETFLIX IS THE 23% MARGIN RANGE. DISNEY IS NEGATIVE. JUST GET ME SOMEWHERE CLOSER TO NETFLIX OR HALFWAY THERE, AND DISNEY HAS
A LOT OF UPSIDE IN TERMS OF EARNINGS POWER. >> AND IN TERMS OF THE ESPN FINANCIALS, IS THAT JUST KIND OF A SIGNAL TO SAY, LOOK, THIS BUSINESS IS STILL VIABLE. IT IS NOT A FIRE SALE. OR DO YOU THINK THEY ARE REALLY PREPPING SOME KIND OF STRATEGIC INVESTMENT INTO THAT BUSINESS? >> WELL, I KNOW ON THE STRATEGIC INVESTMENT SIDE THEY’RE TALKING TO LEAGUES AND DISTRIBUTORS. THEY HAVE BEEN CLEAR ABOUT THAT. TALKED TO SOME OF THE LEAGUES YOU KNOW AND THE MAJOR DIGITAL DISTRIBUTORS. THAT’S THE PLAN. WHAT SURPRISED US IN LAST NIGHT’S RELEASE WAS THE
NON-ESPN NET WORKS WERE MUCH WORSE THAN WE THOUGHT THERE IS AN OPPORTUNITY, WE’RE NOT BULLISH ON OTHER NETWORKS, BUT THEY NEED TO DRIVE PROFITABILITY. THEY NEED TO REDUCE THEIR SPEND, YOU KNOW, CUT EXPENSES, AND TO ME, YOU KNOW, WE’RE, LIKE, WOW, THE ESPN BUSINESS IS NOT AS BAD AS WE THOUGHT. THE TOP LINE WAS MORE STABLE. SO WE THINK THERE IS AN OPPORTUNITY ALSO IN THE LINEAR MARGINS TO BE BETTER. SO, YOU KNOW, ESPN, YOU KNOW,
