Netflix Says No Strategic Shift... Viewing Time Remains a Challenge

Earnings Beat Expectations, but
Revenue Growth Hit a Three-Year Low
Korea Also Cited as a Success Story
Next Year's January Outlook Offers Investment Clues

Netflix said it had no plans to change course despite layoffs and leadership changes. Its results, however, showed slowing growth. The company reported third-quarter earnings on October 20 (local time) that beat expectations, but its quarterly revenue growth rate was the lowest in three years. Executives acknowledged that they need to increase viewing time to drive growth. The approach Netflix takes to address this challenge could affect the position of Korean content.

Netflix Faces Challenges in Boosting Viewing Time and Ad Sales

Third-quarter revenue came in at $12.87 billion, in line with market expectations. Earnings per share also beat expectations. Netflix attributed the main reason operating income exceeded its own forecast to differences between the timing of expenses and its plans. It also cited revenue that came in slightly higher than expected.

Given the difference in the timing of expenses, it is too early to interpret the results as an improvement in the core business. Nor does the fourth-quarter outlook point to a rebound in growth. Revenue is forecast at $13.44 billion, below Wall Street expectations, with growth of about 12%, roughly in line with the third quarter. That is lower than the 17.6% growth recorded in the fourth quarter of last year.

Netflix lowered its forecast for advertising revenue this year from about $3 billion to about $2.7 billion, citing delays in launching some ad products and integrating them with partners. Co-CEO Greg Peters said, "We're a little behind the aggressive targets we set for this year," but added that advertising revenue was growing by more than 80%. This suggests the issue lies with product readiness rather than weak demand. Still, slower growth in viewing time would weigh on ad sales.

No Change in Strategy, But...

Netflix's denial of a strategic shift comes against the backdrop of recent layoffs and leadership changes. On October 14, Netflix laid off 1,000 employees, about 6% of its workforce. The following day, it announced that Chief Content Officer (CCO) Bela Bajaria would step down and that former Disney executive Peter Rice would succeed her. The departure of Dan Lin, head of Netflix's film division, was reported on October 19.

It is still difficult to determine the nature of the layoffs. Netflix said they were concentrated in product, technology, legal, and human resources, while CEO Greg Peters said some areas that had expanded rapidly were overinvested in. Local media, however, reported that executives in the television and film divisions were also among those affected. The number of employees laid off from creative teams has not been disclosed. The cost of the layoffs will affect profitability immediately, reducing the fourth-quarter operating margin by 1.2 percentage points.

Netflix co-CEO Ted Sarandos answers questions from reporters after a discussion on Netflix and Korean content at the Four Seasons Hotel in Jongno-gu, Seoul, on the 22nd. Photo by Joint Press Corps.

Rather than its strategy, Netflix singled out its U.S. business as an area in need of adjustment. Co-CEO Ted Sarandos said, "We don't need a fundamental change in strategy," but added, "We need better execution." The entertainment outlet TheWrap also interpreted the move as a return to Netflix's core film and television business. The question is whether viewing of that core content is increasing. Netflix's content budget has grown to around $20 billion this year, but viewing time increased by 2% in the first half. Some analysts say viewing time per member actually declined. Jefferies, a U.S. investment bank, estimated that average monthly viewing time fell by about a quarter, from 66 hours in the first half of 2023 to 49 hours in the first half of this year.

Netflix and some analysts interpret the slowdown in viewing time differently. Netflix Chief Financial Officer (CFO) Spencer Neumann described viewing time as a factor that can further boost healthy revenue growth. By contrast, Geetha Ranganathan, a senior media analyst at Bloomberg Intelligence, said the fourth-quarter outlook showed that slowing engagement—the quantity and quality of viewing—was carrying over into revenue growth. The significance of the fourth-quarter outlook depends on whether viewing time is seen as a supporting factor or as a foundation.

The gap with YouTube is another concern. Nielsen figures show that YouTube accounted for 14.2% of U.S. television viewing in July, compared with 7.8% for Netflix. Since Netflix must compete with free video platforms for viewing time, it seems difficult to solve the problem with just a handful of titles.

What Does This Mean for Korean Content?

In its third-quarter earnings announcement, Netflix highlighted the success of local content. One prominent example was India, where viewing time increased by about 24% and revenue by about 18%. CEO Sarandos said that similar success was "happening in Korea and Japan, too." If so, Korean content is closer to being part of the solution than the problem. However, Netflix has not disclosed figures for viewing growth in Korea or the contribution of Korean content to revenue.

Even without those figures, the performance of individual titles is clear. This year, "True Education" recorded 60.2 million views—calculated by dividing total viewing hours by the title's runtime—within eight weeks of its release, ranking 10th among the most-watched non-English series of all time. Given such results, Korea seems unlikely to be an immediate target for cost reviews. Nor are there signs of cuts to Netflix's Korean production teams or changes to its investment plans. In January, Kang Dong-han, Netflix's vice president overseeing Korean content, said, "Investment will continue."

Still from the Netflix drama "True Education."

The key variable, however, is where Netflix invests to increase viewing time. CFO Neumann said the layoffs would help clarify priorities and allow the company to continue investing aggressively in areas with the greatest impact, but he did not provide specifics. Instead, CEO Sarandos said new businesses would be managed strictly at an early stage and that about 95% of spending would go to the core business. If investment is concentrated in areas with a proven track record, the prospects for Korean titles will vary. Hit titles like "True Education" are better positioned to attract investment. By contrast, titles without a clear track record of success may face closer scrutiny of their performance relative to production costs.

CFO Neumann said Netflix would provide its outlook for next year's results, including its operating margin, in January. The company, however, does not plan to quantify the impact of the layoffs on next year's costs. A higher operating margin target would leave less room for content spending, while a lower target would leave more. The amount of investment available for Korean titles may also be gauged from that figure.

This content was produced with the assistance of AI translation services.