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Netflix Will Inflate Preferred Key Metric With New Account Sharing Methodology
Investors valuing the streaming pioneer on revenue per user are now at greater risk of being misled and overpaying.
April 20, 2022
Those currently stealing Netflix won’t be asked to pay for it.

Nor will they ever be considered subscribers— even if the owner of the account on which thieves are leeching pays on their behalf.

That’s Netflix’s (NFLX) new strategy when it comes to cracking down on account sharing. While overshadowed by a decline in subscribers and the about face on a lower cost advertising supported tier, Netflix’s strategy will artificially inflate a key metric it prefers to be judged on in the future.

Instead of subscriber growth in the U.S.— now saturated after a pandemic induced pull forward— Netflix wants to be judged on more traditional financial metrics, namely average revenue per member (ARM). Investors must understand the nuance in this calculation because it’s about to change, or at minimum, become less comparable.

Rather than ask the thieves to pay, Netflix plans to ask account owners to pay on the thieve’s behalf. Even if Netflix convinces the account owner to “pay a bit more to share the service with folks outside their home”, Netflix doesn’t plan to count ex-thieves as new subscribers. We suspect this is because it would depress ARM.

In the footnotes of the latest Shareholder Letter, Netflix reveals it defines ARM as streaming revenue divided by the average number of streaming paid memberships divided by the number of months in the period. If Netflix counted ex-thieves whose loved ones have paid on their behalf as new paid members, the denominator in the calculation would increase and ARM— on which Netflix wants to be judged going forward— would be reduced.

Netflix CFO Spencer Neumann put it like this:

“So you should expect that member numbers or subscriber numbers are sort of less relevant over time because these -- it may very likely show up in ARM. So you should think about it as engagement and average revenue per member, probably increasingly important, and then obviously, revenue growth, which we've always said we're trying to optimize, both near- and long-term revenue growth, to drive that positive flywheel of reinvestment in the business. So it's not that there isn't going to be a P times Q. There's still a Q, but increasingly important is probably ARM and engagement and revenue overall.”

Netflix wants it both ways. With U.S. subscriber growth slowing but more lucrative, Netflix asks you to judge it on ARM rather than sub growth. But internationally, where subscriber growth is faster but less lucrative, Netflix wants to be judged on sub growth.

Investors, including some of the world’s best, value Netflix on revenue per user comps. If you use Netflix’s preferred metric going forward in a similar pricing exercise, you’re likely to overvalue Netflix on a revenue per user basis.

Separately, Netflix is no stranger to changing how it calculates key metrics on which it wants investors to focus. In April 2021, DuDil was first to expose Netflix’s new free cash flow calculation that we said hinted at an upcoming acquisition. The new calculation excludes investing cash flows from the calculation, meaning going forward Netflix could make an acquisition while still showing positive free cash flow. Eleven months later, Netflix acquired a video game studio as we suggested it might.
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