Netflix CEO Reed Hastings said the company’s employees are still “feeling the wind” as they manage through COVID-19, but he sees the blockbuster subscriber numbers in the first quarter as a back-to-basics validation.
“We don’t know anything more than anyone else,” he said about the virus during the company’s video earnings interview to discuss first quarter results. “We’re in the same uncertainty that everyone else is. The thing we are certain of is the internet is growing. It’s a bigger part of people’s lives, thankfully. And people want entertainment. They want to be able to escape and connect, whether times are difficult or joyous. We’ve had an increase in subscribers in March that’s essentially a pull-forward of the rest of the year.”
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As to how consumer behavior may be changing day by day, Hastings said it is “super-hard to say if there are strategic, long-term implications,” but that broader assessment will become more clear “in a couple months.”
Netflix earlier Tuesday reported a blockbuster quarter in terms of new subscriber additions, growing by 16 million members around the world to reach just shy of 183 million.
The CEO added that the company’s “guess” is that subscriber numbers will get lighter as the year progresses, even in the usually fertile fourth quarter. As to who the 16 million newest members are, Hastings said they are “more of the same” and not a brand-new demographic group.
Content chief Ted Sarandos addressed the meteoric success of Tiger King and other unscripted fare in the period, also noting that production has begun to haltingly return in places like Iceland and South Korea. He said he doesn’t anticipate making significant adjustments to the flow of programming, even as a way of preserving it during the total shutdown of production.
The 2020 slate is largely in the can and in “finishing stages,” so the release schedule is unlikely to undergo the kinds of changes being implemented by most traditional studios and networks.
“We continue to experiment with all kinds of release strategies,” he said. Love is Blind racked up strong viewing in the first quarter as a staggered (i.e., not binge) release, he noted. Too Hot to Handle, which premiered this month, is on track to be Netflix’s most-viewed competition show ever and it had all episodes released at once. “We keep testing it,” Sarandos said of alternatives to the binge-release model that is the company’s hallmark. “But I don’t see us moving away from that meaningfully.”
Sarandos said the partnership with Disney on Michael Jordan documentary The Last Dance made sense for both parties, even though it would be far less likely today given Disney’s competitive positioning of Disney+ and ESPN+. Netflix, which will release the doc series to U.S. viewers on its platform in July, premiered the first two episodes on Sunday outside the U.S. in tandem with the linear premiere on ESPN. The show got “enormous viewing,” Sarandos said, and benefited from a complementary set of business goals. Netflix doesn’t have as tight a relationship with the NBA as ESPN, while Disney’s global streaming infrastructure isn’t yet at Netflix’s scale. Jordan and “the creative team were very excited to have Netflix involved with it,” he noted of the collaboration cemented in 2018.
Chief Product Officer Greg Peters said the notion of higher subscription rates is off the table given the coronavirus. Pricing is a frequent focus for the investment community given the company’s massive content spending and plowing of profit back into the company. “We’re not even thinking about price increases,” Peters said.
CFO Spencer Neumann said positive cash flow of $162 million in the quarter was unrelated to the virus. Internal forecasts prior to the virus called for negative free cash flow for 2020 of about $2.5 billion and now that figure is less than $1 billion due to interrupted productions whose expenses will be pushed into 2021 and beyond. He described the pushed shows as a “minority” of originals, noting that more originals will stream in 2020 than in 2019 despite the production shutdown.
Netflix has seen its fortunes and share price rise during a period when several major companies have launched competing streaming services. Disney, Apple, NBCUniversal and Quibi have all gotten in the game, with WarnerMedia’s HBO Max coming on May 27.
Hastings complemented Disney on ramping up quickly with Disney+, which has surpassed 50 million subscribers just six months after launch. “I’ve never seen such a good execution of the incumbent learning the new way and mastering it,” the CEO said.
Netflix got ahead of the work-from-home-via-Zoom curve years ago, switching from the typical audio conference call with Wall Street analysts to a video conversation moderated by a single analyst and posted to YouTube. As a visual representation of what much of the world is experiencing, the call had a fitting atmosphere. (Watch the whole thing above.) Executives are routinely shown each quarter speaking individually. Given the virus, they spoke this time to moderator Michael Morris of Guggenheim Securities from unspecified quarantine quarters. Hastings, for instance, was in a loft-style space filled with a large bed covered by a blue comforter. Sarandos was in a tastefully appointed, brick-walled kitchen.
“Our small contribution in these difficult times is to make home confinement a little more bearable,” Hastings said.
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