YESTERDAY, IN A MEETING with a major Canadian media company, I was asked “What’s next for Netflix?”
In my role at Deloitte, I don’t ever talk about stock prices, and I usually try to avoid commenting on individual companies. But Netflix is hard to ignore: it competes for audiences and it spends a lot of money on content. So I took a swing at answering at a REALLY high level.
“Netflix just reported that they have 125 million global subscribers. If they can double that over the next ten years, and they can also double what they charge, they will have 250 million subs paying $20 per month. Which is (pause for jet-lagged mental calculation) US$5 billion in revenues. Each month. Or US$60 billion per year.”
There was a slightly stunned silence in the room. I’ll explain why in a minute, but I want to point out that I am not making an actual prediction on Netflix here. This is just kind of ‘back of the napkin’ thinking about what the media industry might look like ten years from now. I find this a useful exercise for a lot of strategy stuff.
Do my numbers make sense?
According to the Netflix results for Q1 2018, total global subs were 125 million, although only 118.9 million are paying customers, with the balance on the free month trial. The company is adding about 7.5 million subscribers per quarter at this time (8.33 million in Q4/17, 7.41 million in Q1/18, and is forecasting 6.2 million for Q2/18, although they have been beating their forecasts most quarters.) Most of those are converting to paying subscribers in the following quarter.
Therefore Netflix is at a run rate of adding about 30 million subs per year. At that rate, they would have about 425 million paying subs by 2028, not 250 million. My assumption is intentionally conservative. Possibly MUCH too conservative, but I’ll stick with it for now.
In the quarter, the company had $3.602 billion in streaming revenues from 118.9 million paying subscribers, so quarterly revenues of $30.29 per sub per quarter, or $10.10 monthly. In the U.S., they have raised prices 12% over the last year, with no slowdown in growth or customers quitting over the increase. Internationally, ignoring currency swings, monthly revenues per subscriber increased 13%.
At a rate of 12-13% annual price increases, Netflix would cost more than $32 per month by 2028. That feels too high, so I will stick with my assumption above, that they double the monthly price over the next decade to about $20, which equates to an annual increase of 7.1% compounded.
Why does this matter?
In some ways it doesn’t. If Netflix reaches 250 million subs in 2028, that is a lot more than today… but still small compared to traditional TV viewers worldwide, which were about 1.6 billion TV households globally in 2016, projected to grow to 1.68B by 2021, so likely 1.8B by 2028.
The amount of time each subscriber spends watching Netflix seems to have plateaued or is even declining. Worldwide TV revenues are around $380 billion in 2018 ($200B in pay TV revenues and $180B in advertising) so although a hypothetical 2028 Netflix top line of $60B is big for a single company, it is still small in the context of the overall industry. Although TV revenues globally are not growing as fast as Netflix, neither are they shrinking: estimates for the industry worldwide in 2021 suggest it will be roughly flat, or even up slightly, and I assume about the same for 2028.
“I don’t see spending growing unreasonably, but could they be spending over $30 billion by 2028?”
Whether we look at subscribers, time spent, or even dollars, there seems to be ample room for Netflix to coexist with the traditional TV industry.
Where it does matter is content spending.
Netflix will spend about $8 billion on content in 2018. Compared to 2017 revenues of $11.243 billion, that seems really high: no media company can spend over 70% of revenues on content! As a comparison, Time Warner also spends about $8B on non-sports content, but has revenues of over $30B.
The media conversation I keep hearing is:
“Netflix sure spends a lot. It is driving up the price of content for all of us. Thank God they can’t spend any more than they already do. That would be real trouble.”
Without getting into an actual forecast of what current year revenues will be (that comes too close to the kind of company-specific opining I won’t do), my napkin math suggests that they could have 2028 revenues of $60B or so.
I don’t think they will be spending 70% of those conjectured revenues on content. But 50% is plausible.
That Netflix is close to some sort of “ceiling” on content spending at $8 billion per year looks unsupportable in this scenario. I don’t see spending growing unreasonably, but could they be spending over $30 billion by 2028?
Yes. And that is about as much as NBCU, Fox, Time Warner and Disney spent on non-sports content last year.
Combined.
As always, some disclosures. None of the numbers above are official from my day job. This isn’t a prediction, merely a thought exercise to answer the question of “where does Netflix go from here?” Most importantly, although I am a former portfolio manager, none of this should be used as investment advice, or constitutes an opinion of NFLX share price or valuation. That isn’t just boilerplate disclaimer: the stock is already highly valued, and I literally have NO OPINION at all on whether the price goes up or down. Neither I nor my wife owns any shares or interest in NFLX.
Duncan Stewart is director of research at Deloitte Canada.
