Netflix's avengers shield is still working

It's not what Netflix Inc. shareholders wanted to hear: The online video service lost 430,000 subscribers in the U.S. and Canada last quarter as life began to return to normal in that region. But as for the knee-jerk fear that these are signs of Netflix finally beginning to cave to competition? Not even close. 

Shares of Netflix toggled between gains and losses after Tuesday's earnings report, a reflection of the subscriber base shrinkage in North America and a tepid forecast for the third quarter. After adding an astonishing 37 million subscribers globally last year while the world lived under quarantine, investors are finally understanding what Netflix executives meant when they said that pace simply wouldn't — couldn't — last. It projects just 3.5 million new users globally this period, after signing up 1.5 million in the second quarter.

Walt Disney Co.'s presence, full of superheroes and spaceships, looms large in the background as new movies and a hot new series called "Loki" were added to Disney+. "Black Widow," its latest Marvel film starring Scarlett Johansson, became available for purchase July 9 on the app alongside its theatrical debut. And in early June, Nielsen data showed that Disney+ had three of the 10 most popular streaming movies, breaking up a ranking that at one time may as well have been a guide of what to watch on Netflix. (HBO Max, which isn't counted in the Nielsen data, has also been adding new feature films that may be stealing viewers' time from Netflix, if not their dollars.)

But a few factors were at work last quarter that don't involve fictional Marvel villains and plus signs. For starters, while Covid-19 lockdowns took their toll on the programming schedules of many Hollywood studios and cable-TV networks almost immediately last year, Netflix is experiencing that on a lag. Disruption to its productions contributed to a lighter fare for this most recent period, which leaves more for Netflix subscribers to look forward to for the rest of the year. New seasons of the highly rated "Money Heist" and "Sex Education" are among its third-quarter additions, as well as the Jason Momoa action film "Sweet Girl."

Unlike other companies that have initially leaned on dated film libraries and brand cachet to introduce rival streaming-TV services, Netflix seems to fully grasp that only a continuous slate of new programs will keep people paying month to month. User retention, it said in Tuesday's letter to shareholders, "continues to be strong" and better than it was at this time two years ago, when it similarly suffered a temporarily alarming loss of North American customers. In fact, Netflix's subscriber churn is estimated to be well below that of all its competitors, Antenna data show. This is becoming the single most important metric to track as the emphasis shifts from Netflix's at one time stunning subscriber growth to expanding profit margins. Steven Cahall, an analyst for Wells Fargo & Co., estimates that revenue growth will increasingly come from higher prices instead of a rising number of users:

One strategy it's testing to target new users and retain the ones it has is video games. Netflix clarified Tuesday that its push into that area is about attracting some of the mobile gaming audience. It's hard not to notice that mobile games provide an obvious opportunity to sell advertising, something Netflix has been reluctant to do as it searches for new revenue sources. On Tuesday, Netflix said it won't sell ads on video games, but it's too early to predict what comes of that further out. 

For the first time, Netflix is experiencing what it's like to be the mature incumbent in an industry and to have very real competition. Shareholders can probably save themselves the post-earnings dramatics, though. They always come around to the same conclusion: Netflix is still the first choice for streaming, and everyone else is competing for second place. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.