Netflix: The Streaming Wars That Never Started

Netflix reported its fourth-quarter results last week. Here’s the shareholder letter.

Netflix is back to firing on all cylinders. I won’t rehash the whole quarter, but the company just added 13.1 million paid net adds—the second-most after the first quarter of 2020—grew revenue 12.5% year-over-year (13% in constant currency terms), expanded its operating margin almost 10% year-over-year, generated $1.6 billion of cash, and bought back $2.5 billion of stock at an average price of $456.40 in the quarter.

For the full year, Netflix added 29.5 million paid net adds—the second-most ever after 2020—grew revenue 9% in constant currency, expanded operating margin 2.8% year-over-year, generated $6.9 billion of cash, and bought back $6.0 billion of stock at an average price of $416.51 per share.

More people are now acknowledging that Netflix won the “streaming wars,” but that implies the streaming wars ever happened. It was more of a cold war that never turned hot. In fact, the opposition gave up before it started and began selling its weapons back to Netflix. What’s surprising is that this is a surprise at all. When you have $30+ billion of streaming revenue, enabling the funding of $17 billion of cash content spending, which drives far more subscriber engagement than anyone else, which drives pricing power that no one else has, which drives even more revenue with which to reinvest in more content and technology to continuously make the service better, how was anyone else going to put up a serious fight? They didn’t and they were never going to despite their best efforts.

Simply put, establishing a growing, profitable streaming service with the world at your fingertips is really hard when Netflix already exists. It doesn’t matter who has a larger percentage of high-brow “quality” content. It doesn’t matter what 20-year-old IP you might have in your vault. What truly drives engagement and therefore streaming success is an absolutely massive firehose of new content across genres and geographies. And no one but Netflix can economically justify buying the firehose.

That is very unlikely to change. Competitive streaming services have been raising prices, removing content, and licensing once-exclusive content to Netflix in an effort to make their economics work. But each of those moves makes their consumer value propositions worse. They might reach profitability but then what? Simply put, it’s much harder to grow when you raise prices and make your offering worse. Their hope is no one will notice. But stranger things® have happened than losing customers who experience deteriorating value propositions. I’m not predicting that but it’s possible.

On the other hand, Netflix is going from strength to strength. The new ad tier while still small grew members 70% quarter-over-quarter in the fourth quarter after growing 70% and 100% sequentially in the two prior quarters, respectively. It now has 23 million MAUs and is now attracting 40% of new sign ups. It also monetizes better than the Standard plan and far higher than Netflix’s overall average revenue per member (“ARM”). That’s why management is starting to eliminate the Basic ad-free tier all together in some markets to either nudge those members into the cheaper but higher monetizing ad tier or the higher monetizing ad-free tiers. As Netflix grows ad tier MAUs and ad inventory slots, Netflix will become increasingly attractive from an advertiser perspective. We just learned that Netflix signed a 10-year deal with WWE for live programming and other content, which will create even more ad inventory. Beyond that, improved ad targeting, measurement, and possibly differentiated ads that improve engagement are coming.

Paid sharing has successfully grown subscribers and ARM through extra members. While management said they have now finished “operationalizing” paid sharing, those gains are not over. This has been a gradual rollout. I know people personally who are still sharing for free who haven’t been forced to make a change yet.

As for guidance, management expects double-digit revenue growth on a constant currency basis this year driven by member growth and constant-currency ARM growth due to price increases. Operating margin guidance for this year was raised from 22%-23% to 24% compared to 20.6% last year—340 bps of margin expansion. First-quarter guidance calls for 13% revenue growth or 16% on a constant currency basis. Free cash flow is expected to be another $6 billion, down a little as cash content spending is expected to jump $3-$4 billion versus last year. Although, Netflix typically comes in somewhat light of its cash content spending guidance, which if true again, would imply more than $6 billion of free cash flow this year. That will almost certainly grow in 2025 given further revenue growth and operating leverage that comes largely as a result of fixed cost content.

So What’s Next?

Netflix is going to continue running its global playbook. There are over 500 million…