Netflix’s second quarter topped Wall Street’s expectations on its top and bottom lines, driven by a slate of popular returning shows, and provided guidance for the rest of the year.
But the question will be, having decisively won the first era of the Streaming Wars, where does Netflix go from here?
After-hours trading following the earnings release sent shares down about $20, or roughly 1.5%, though more generally, the company’s stock skyrocketed a whopping 128% over the past year at around $1,253 apiece.
Needham & Co. senior analyst Laura Martin, who has a $1,500 price target for Netflix, said on CNBC before the results were released that Wall Street is focused on a couple of key issues going forward: how much the company will spend on content, and whether that will incorporate more live-sports video rights spending.
“I think Wall Street would be okay if they went to $18 billion,” in annual content spending, Martin said. “Where does live sports fit?”
Indeed, that’s a crucial question. Netflix executives have said in repeated earnings calls the past few years that they expected to spend around $17 billion on all their content spending worldwide.
The company’s executives repeated that mantra on Thursday’s earnings Q&A with analysts, suggesting in passing that they were spending closer to $16 billion this year. MoffettNathanson’s Robert Fishman asked about the company’s sports rights acquisition plans now that Formula 1’s deal appears likely to go to Apple’s TV+ platform at a reported $150 million per year.
“Remember that sports are a sub-component of our live strategy,” Co-CEO Ted Sarandos said. “We focus on ownable, big breatkthrough events.”
That includes another year of two NFL games on Christmas Day, the Screen Actors Guild Awards, weekly WWE Smackdown ‘casts and upcoming combat sports fights and exhibitions.
All of those rights deals “have to make economic sense as well,” Sarandos said, perhaps suggesting $150 million a year for the F1 rights is a bit steep. Current rightsholder Disney/ESPN reportedly had offered a big bump, to close to $100 million, but wasn’t going to try to match Apple’s $3 trillion wallet.
Sports and live events only drew about 200 billion hours hours of viewing, a small number in the vast reaches of Netflix audience data, but Sarandos said “not all view hours are equal,” with sports and other live events helping with audience engagement and watch time overall, and probably with retention in an industry struggling elsewhere with customer churn rates.
So Sarandos said the company is optimistic that it can further drive viewership in 2025’s second half after seeing only 1% growth in view time in the first half. The 2025 slate is heavily weighted toward the back half of the year, featuring established hits such as Stranger Things and Wednesday and an already released final season of massive Korean hit Squid Game.
Stranger Things creators the Duffer Bros. have a new show coming, and Oscar-winning writer/director/producer Greta Gerwig is bringing her take on the Chronicles of Narnia. Other likely hits are more seasons of Millie Bobby Brown’s Enola Holmes, the live-action One Piece, The Last Avatar, Lupin and Berlin.
“We can accelerate our growth with big hits, but that accelerates growth only about 1%,” said Sarandos. “It’s about a steady drumbeat of shows and films, and soon games. We had 44 shows nominated for Emmys this year (in last week’s announcements). That’s what quality at scale looks like.”
Netflix has raised prices on its top tier pretty much worldwide in the past year, bumping up revenues while not appreciably denting its industry-leading low churn rate of around 2%.
Needham analyst Martin suggested the Street wants to know how Netflix is leveraging its vast oceans of data with generative artificial intelligence tools. It’s a question facing every tech firm, and many not so technical ones too. And it’s further complicated by labor contracts that Netflix and other media companies have signed with the Hollywood guilds that limit the use of AI tools in many creative corners of the business.
Those Hollywood contracts don’t cover what Netflix productions from dozens of other cities around the world, however. Co-CEO Ted Sarandos pointed to a small Argentine production that wanted to incorporate a collapsing building into its story.
Creating the scene with traditional visual effects would have been prohibitively expensive, but the production turned to a set of AI tools developed by Eyeline, the skunk works, er, “production innovation shop” inside Netflix’s in-house visual-effects company, Sarandos said.
“The cost wouldn’t have been feasible on a project with that kind of budget,” Sarandos said, but the AI scene was created 10 times faster, at a dramatically lower cost, and still worked for the creators and the audience. “More importantly, the audience was thrilled. [AI] expands the possibilities on the screen.”
Even with U.S.-based productions governed by the guild contracts, there’s plenty that AI can still reshape – such as better ad-targeting, more relevant program recommendations, and highly specific trailers and thumbnails that pull the elements from a show that a given viewer is likely to most be interested in, said Co-CEO Greg Peters.
The company “has been in the personalization and recommendation business for two decades,” Peters said, but AI will allow it to do a better job, for instance with the ability to use natural-language conversations with the Netflix search engine to more precisely find something to watch.
“We see all the work we do there as a force multiplier,” Peters said. “There’s a bunch of places where we think we have an advantage in terms of data and scale.”
Martin suggested that for many investors going forward, the Walt Disney Co. might be a better bet as AI opens the spigot of content creation to a vast new ocean of democratized content creation. Disney sidesteps some of that because nearly half its revenues come from its parks and resorts, among other business unites that are impossible to replicate with AI-generated content.
Until recently, the company’s gargantuan content spend didn’t include any live sports or other events for its streaming-only operations. That’s changing rapidly.
That total also didn’t include the legacy theatrical exhibition, broadcast and cable spending that traditional media companies have traditionally relied on to maximize their revenues, all of which are in secular decline.
As a result, one thing is almost certain: The growth Netflix seeks won’t be coming from a big acquisition of one of the Hollywood media companies now trying to figure out their futures.
Both Comcast’s NBCUniversal and Warner Bros. Discovery are busy spinning off most of their cable networks and other legacy assets facing structural decline. Paramount is in the throes of an $8 billion acquisition by David Elllison’s Skydance, and Lionsgate just split off its Starz streaming unit.
“We agree that continued consolidation is likely,” said CFO Spencer Neumann. “But within legacy media, we don’t think that materially changes the landscape.”
Netflix has “no interest in owning legacy media networks,” Neumann went on. When the company applies its framework to possible acquisitions, “one of the things we look at is the opportunity cost.”
An acquisition, especially in a massively politicized regulatory environment, is likely a distraction from other things the company could do with the money, like buy more programming or returning cash to shareholders with stock buybacks.
