Are Netflix set to dominate the video games market?

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Global streaming service Netflix added 1.5 million new global paid subscriptions in the second quarter 2021. That’s better than guidance of one million, but down on the 10.1 million added this time last year, and the four million added last quarter.

The total number of paid subscriptions is now 209.2 million globally, up 8.4% on last year.

The group highlighted that paid memberships in North America and Canada fell slightly, due to the “large membership base” and “seasonally smaller quarter for acquisition”. Next quarter Netflix hopes to add 3.5 million paying subscribers.

Excluding the impact of exchange rates, average revenue per user (ARM) rose 4%. The strongest growth came from Netflix’s biggest market of North America and Canada, which rose 9% to $14.54. Europe, Middle East & Africa and Latin America both rose just 2% to $11.66 and $7.50 respectively, while Asia Pacific was up 1% to $9.74.

Growth in subscribers and ARM meant reported revenue was up 19.4% to $7.3bn. Operating margins of 25.2% were 3.1 percentage points higher than last year, and operating income was up 36% to $1.8bn.

Netflix said it plans to expand further into games, viewing this as a “new content category”. Games will be included in subscriptions at no additional cost, with the group initially focussing on mobile games.

$8.0bn has been spent on content so far this year. Free cash flow swung from $899m to -$175m, as last year’s production shutdowns preserved cash, but sets are now back up and running. Netflix still expects to be free cashflow neutral at the full year.

Net debt at the end of June was $7.8bn, compared to $8.1bn at the start of the year. $0.5bn of the $5.0bn share buyback programme has been completed.

The shares fell 1.7% in after-hours trading.

What will happen next?

Sophie Lund-Yates, Senior Equity Analyst at Hargreaves Lansdown spoke to Business Leader on what the future holds for Netflix.

A foray into the world of gaming might simply sound like a nice idea, but it’s an important next step in Netflix’s efforts to keep our eyes on its screens. Netflix’s engine drivers need some grease. People rushed to sign up during the pandemic, but now things are returning to normal, that source of extra horsepower is no more, and means the group added its lowest number of new subscribers in years last quarter. A very high proportion of younger people already have a Netflix subscription, so getting them hooked on games, by leveraging its original content is a potential stroke of genius. It will also play into Netflix’s core strategy, which is to make more money from developed markets by increasing prices – which should be an easier job thanks to the pandemic, where streaming has become even more of a habit than it was before.

Netflix’s significance to modern living cannot be overstated, and that is to be applauded. However, the group is its own worst enemy in some respects. It’s enormous growth over the years means it needs to work hard now to stay relevant and not let rivals take its market-leader crown. Competition is the biggest threat to the Netflix investment case. It’s reasonable to think the average customer will happily pay for two streaming subscriptions, like Netflix and Prime. The water’s being muddied by the unstoppable rise of Disney+ and its wider family including Hulu though. Murmurings of rising inflation could also add pressure to this situation – if the customer base feels like their spending power’s being diminished, they will be even more discerning about the luxuries they’re willing, or able, to shell out on. That’s something to watch out for given the slowdown in growth in the group’s most important region of North America and Canada

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