Yahoo Finance How Squid Game saved Netflix & why investors are bullish
Reviving Netflix's original-content strategy, while opening up strategic new markets, the success of Squid Game will help the streaming giant land new customers and ink new deals.
Netflix's original content is more important to its success than ever, as traditional content giants like Disney and Paramount take back the rights to their hot properties to headline their own fledgling streaming services.
Initially, the COVID-19 pandemic was a major shot in the arm for Netflix. With people stuck at home, binge-watching their favourite streaming services, the early days of the pandemic added a record number of new subscribers.
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However, COVID-related production shutdowns and streaming fatigue finally caught up with Netflix this year. In the first half of the year, it reported its slowest pace of subscriber additions since 2013, and blamed the dearth of new hit shows for some of its struggles.
It experienced a mixed Q2, losing subscribers in the US and Canada, while missing its estimated earnings per share, all while its rivals thrived.
Enter, Squid Game
The South Korean smash hit has been watched by more than 111 million households around the world, to surpass Bridgerton as Netflix's most popular new series ever.
Squid Game is so popular that a South Korean internet provider sued Netflix, claiming the show caused a surge in traffic, which increased their maintenance costs.
For Netflix, the entire season of Squid Game only cost US$21 million to produce – less than some series spend on a single episode. That investment is now estimated to be worth around US$900 million.
Netflix stock is up 16 per cent in Q3 2021, in part thanks to the runaway success of Squid Game, but its real value is the long-term opportunities it has created.
APAC expansion
The show's success has opened up the potential for further expansion into the Asia-Pacific (APAC) region, where Netflix has traditionally struggled to gain a foothold.
Filmed in Korean and dubbed into English, Squid Game was a big hit with locals – where previously most content wasn’t made in their mother tongue.
The response was clear. Netflix has just 16 per cent penetration in the APAC region, but more than 50 per cent of new subscribers came from this part of the world in Q3 2022.
We can expect Netflix to produce more foreign-language content in the next 12 to 18 months, opening a substantial addressable market.
Investing in new content
Netflix has spent around US$8 billion this year creating new content, in a bid to impress subscribers and investors alike. Around US$1.5 billion of this was earmarked for Asian originals, with Netflix demonstrating its ability to help such content find a global audience.
Netflix global TV chief Bela Bajaria recently told Fortune that US viewership of foreign-produced series increased by 71 per cent since 2019, with 97 per cent of US subscribers watching at least one non-English title in the past year.
All that spending on more diverse content should help drive new subscribers to the platform. Moreover, the bump in spending should last into 2022, as Netflix is likely to balance the content over time to support continued subscriber growth.
Squid Game is not a one-hit wonder, with other popular foreign-language Netflix shows such as Money Heist set to return. Meanwhile, Netflix has hedged its bets by also spending up big on classic hits such as Seinfeld.
Positive forecast
Netflix has burned cash for a long time on its way to generating 213 million subscribers, but management expects the company to be cash-flow positive in 2022.
It may have turned a corner on the cash front, leaving it plenty of room to continue to invest in content moving forward, with cash to spare. Lower production costs in regions like APAC, compared to the US and Europe, will also help the bottom line.
The reopening of the economy after the pandemic left investors questioning Netflix’s future growth, but its huge cash spend and improved content has changed investor sentiment back to bullish. On top of this, price increases globally should help offset the rising costs of production.
It would seem Netflix has cemented its ubiquity among consumers, with the lowest churn rate of the major SVOD (subscription video on demand) players, but history tells us no business is too big to fail.
The success of Squid Game and a strong focus on international markets should help the streaming giant maintain a firm grip on viewers.
Josh Gilbert is market analyst at eToro.
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