Why debate around Netflix’s engagement slowdown needs more nuance

Research evidence excerpt

Why debate around Netflix’s engagement slowdown needs more nuance

Barclays | Signal in the Noise Vol. 236

valuation factor given the strength in the company’s subscriber growth until last year. In fact,

the engagement weakness was initially attributed to the growth in subs because of the tailwind

from paid sharing, which eliminated viewership from accounts sharing passwords. However,

with no subscriber disclosure anymore, engagement growth has effectively become a proxy for

growth quality.

FIGURE 1. Netflix aggregate engagement hours have remained FIGURE 2. Aggregate hours spent on Netflix originals have gone up

relatively flat for 2 years despite subscribers growing over this period faster than total engagement

Source: Company Reports, Barclays Research Source: Company Reports, Barclays Research

It is tough to dismiss these concerns given the lack of visibility on other growth drivers such as

pricing and subs. At the same time, however, this perspective on engagement alone is also quite

narrow and can be misleading, especially with respect to its growth impact, as engagement

hours are not created equal.

Netflix’s focus has to be to drive up value per hour rather than hours, especially as its

penetration rates reach maturity in major markets. Some of this value is definitively linked to

reach scale in the absolute. For instance, historically, the CPM gap between the #1 and #2

network in any given category (e.g., Nickelodeon vs Cartoon Network in the kids category) has

always been a lot higher than what can be explained simply by viewership differences. This is

partly on account of the yield efficiency of reaching a bigger audience in a prime viewing slot,

which in turn theoretically needs fewer ad buys to generate the same effectiveness.