Netflix posted outstanding profits for 2023. The reason, however, is not what everyone expects.
Netflix posted better-than-expected financial statements on Tuesday, showcasing higher revenues, profits, and earnings-per-share than Wall Street had predicted.
The streaming giant added 13.2 million subscribers in Q4, much higher than its own prediction of 9 million. Revenues came in at $8.83 billion, beating Wall Street estimates of $8.71 billion.
Earnings-per-share was the only major metric that missed expectations, coming in at $2.11 instead of $2.20.
The report sent Netflix’s stock price up almost 15% in intraday trading, breaking the $550 point.
Last year, Netflix went through significant changes in its customer relationship, which the market points to when explaining these amazing financial performances. Netflix cracked down on password sharing, imposing a fee for each new profile into an account. It also introduced an ad-based subscription tier, which passed 23 million active users according to the report.
Following these changes, other streaming companies implemented similar measures, including Amazon Prime Video and Disney+.
According to Deutsche Bank analyst Bryan Kraft, “2024 will be more about growing the ads tier base and building out the international sales effort than scaling ad revenue in a meaningful way.”
There is, however, one major (and more subtle) reason why these added revenues are generating more profit. According to the report, Netflix’s profitability increased 21% for 2023, ahead of the 20% expected.
Fewer originals, more licenses
In the 2010s, Netflix thought it had changed the audiovisual industry forever. Its business model essentially consisted of purchasing licenses for movies previously released in theaters and placing them into a large catalog fully available for a monthly subscription.
Licenses were a one-time purchase and the revenues they generated were much higher than the expense in the long term.
Profits were so high that Netflix decided to try and change the whole audiovisual industry. It decided to create its own original productions, investing billions every year in new movies and series only for its subscribers. These movies would not be released in theaters (or only for limited windows) and Netflix would spend far less on marketing.
Unfortunately for Netflix, however, this model did not work. Studies show that movies with a theatrical window get far more visibility and attention than movies only released in streaming. This meant that Netflix was not covering the expenses for these products only through new subscriptions.
Netflix realized this mistake and is actively working to reduce expenses on original productions and going back to licensing movies with a previous theatrical window. Between 2021 and 2022, the share of Netflix originals in the catalog increased by 10%. In 2023, this share only increased by 5%.
The company is returning to its old, more profitable business model. And it’s seemingly giving up its dreams of forever replacing film theaters.
