It turns out striking Hollywood writers aren't hurting streaming giants like Netflix quite like they wanted to—in fact, it's freeing up over a billion in cash for the business.
On its Q2 2023 earnings call Netflix's co-CEOs Ted Sarandos and Greg Peters outlined their desire to bring the strike to a close as soon as possible.
But the pair side-stepped claims they were going to run out of content for the platform, adding that they had increased their free cash flow forecast for 2023 from $3.5 billion to $5 billion as a result of shuttered production.
Sarandos began the call—where he was interviewed by Bank of America's analyst Jessica Reif Ehrlich—by saying he came from a union family himself, adding: "These strikes are not an outcome that we wanted.
"We're super committed to getting to an agreement as soon as possible, one that's equitable and one that enables the industry and everybody in it to move forward into the future."
Members of the Writers Guild of America (WGA)—which reportedly has around 6,000 members— have refused to work since May 2. They were followed by the Screen Actors Guild and the American Federation of Television and Radio Artists, known as SAG-AFTRA, on July 13.
The last time SAG-AFTRA—Hollywood’s largest union which represents 160,000 film and television actors—joined the WGA was in 1960 as movies aired on TV.
The current strikes arose out of demands for increases in base pay as well as writers and actors asking for a greater portion of earnings from shows and movies that appear on streaming services.
Responding to a question about whether Netflix will run out of content—a fear shared by entertainment mogul Barry Diller—the streaming bosses referred to its letter to shareholders for the quarter, which announced upcoming releases such as British Royals drama The Crown, British crime drama Top Boy, and reality shows like Too Hot To Handle.
These backstops are "besides the point" Sarandos insists, saying the "real point" is to finalize negations with the striking unions.
The short-term easing of cash flow this quarter may give way to "lumpiness" in the road ahead, CFO Spence Neumann warned on the call, as production engines start up again once an agreement with unions is reached.
"More broadly, we're past that most cash-intensive phase of building out our original programming strategy," Neumann said. "So, we'll have some near-term lumpiness. But if we apply a multi-year lens, we expect positive and growing free cash flow trajectory in the years ahead."
Password payoff
Despite fury from customers—and cheeky criticisms from rivals like Amazon Prime—Netflix's crackdown on password sharing seems to have worked.
https://t.co/dHgkuwiuHB pic.twitter.com/PkFhbOoWNd
— Prime Video UK (@primevideouk) May 25, 2023
"We’ve made steady progress this year, we have more work to do to reaccelerate our growth," the company wrote in its letter to shareholders.
Steady progress comprises of an additional 5.89 million customers in the second quarter of the year, up 8% year-on-year. As a result Peters declared the initiative is "working," adding he expects to see more sign ups in the coming months.
He explained: "It's not an overnight kind of thing because the interventions are applied gradually and because some borrowers won't immediately sign up for their own account but will do so next month or three months or six months—or maybe even longer down the line—as we launch a title that they're particularly interested in."
It was a controversial move by the streaming giant, which had previously said it didn't care if its customers shared passwords. However the company confirmed sign-ups are already exceeding cancellations after having rolled out the scheme in major territories like the U.S. and U.K. in May.
The bottom line could be further boosted by Netflix announcing earlier this week it was pulling its lowest-priced ad-free subscription of $9.99 a month. Customers already on the plan can continue with it, but new or returning sign-ups won't be able to access the bottom rung of the pricing ladder.
Wall Street is underwhelmed
Despite sales growing 2.7% in the quarter to $8.19 billion, the business's Q3 expectations failed to impress Wall Street.
The company's shareholder letter also revealed it expects to bring in $8.52 billion in the third quarter, compared with the $8.67 billion figure Wall Street was hoping for.
As a result shares in Netflix fell by approximately 7% in premarket trading before New York exchanges opened on Thursday morning, having previously closed at $477.59.
LightShed Partners analyst, Rich Greenfield, told Bloomberg the results were fine "but not enough to move the stock higher given the move in past three months.”
Netflix's share price has enjoyed a buoyant start to 2023, up approximately 62% in the year to date from $295 at the start of the year.
