Netflix: revenue boost from password crackdown unlikely to spawn a sequel

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Netflix’s crackdown on password sharing received a big thumbs down from users. But the move is proving to be a hit with investors. The video streaming business has reported a surge in subscriber growth.

The company added nearly 9mn net subscribers during the third quarter as it converted former freeloaders into paying customers. That is ahead of expectations and marks the largest quarterly growth since the second quarter of 2020.

Netflix shares rallied 15 per cent on the news. That puts the stock on a multiple of 25 times forward earnings — more than Disney but well below the three-year average.

Shareholders bingeing on the stock should ask whether the hits can keep on coming.

Netflix has countered negative forecasts. Subscriber numbers are expected to increase by a similar amount in the fourth quarter. It is raising prices for basic and premium subscribers in the US, UK and France. In total, operating margin is now expected to come in at 20 per cent for the year, at the top end of the company’s guidance.

But as Netflix concedes, 2023 is “a pretty unusual year”. Most of its revenue growth has come from member growth. What happens when all the free riders have stumped up — or opted to read a good book instead.

Price increases will help. But the effects may be limited given the largest share of membership growth comes from countries where plans cost less. Despite the jump in net subscribers during the third quarter, average revenue per member fell 1 per cent year over year. 

Even free cash flow, which is expected to come in at an impressive $6.5bn this year, looks temporary. The number, up from $1.6bn in 2022, is boosted by lower spending on content as a result of the Hollywood writers’ strike.

Efforts to build up an advertising revenue stream remains a work in progress. Price increases for ad-free streaming are clearly aimed at steering more viewers towards ad-supported plans.

The problem is this is a crowded space, with rivals including Disney, Paramount, NBCUniversal and Warner Bros. Discovery is set to do the same thing. A good TV series rarely spawns a superior sequel.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore