Netflix Inc. NFLX -3.23% said co-founder Reed Hastings has stepped down as co-CEO and will become executive chairman in a leadership change that comes as the streaming giant beats its own forecast for subscriber earnings.
The company on Thursday named heir apparent Greg Peters – who was key to the rapid launch of an ad-supported tier of Netflix and previously served as chief operating officer – as co-CEO alongside Ted Sarandos.
“Frankly, they’ve been running the company more and more,” Mr. Hastings said of Messrs. Sarandos and Peters during a video interview for investors on Thursday.
The streaming industry faces very different challenges: Investors are now valuing profitability versus subscriber growth, and consumers have become increasingly fickle given the ever-growing number of streaming options.
The move marks the end of Mr Hastings’ 25-year tenure at the helm of Netflix, which he helped transform from a DVD-by-mail upstart to the world’s dominant streaming service. As subscriber growth slows, Netflix is trying to boost revenue by using advertising and cracking down on account sharing.
The company’s board has been discussing succession planning for many years, Mr Hastings said in a blog post on Thursday. He said becoming executive chairman is a step founders often take when stepping down from the CEO role, naming Microsoft Corp. co-founder Bill Gates and Amazon.com, Inc. founder Jeff Bezos , as prominent examples.
Netflix said Thursday it beat its own forecast for subscriber earnings in the final quarter of the year, adding nearly 7.7 million new customers. It had previously said it expects to add 4.5 million during the period.
“2022 was a tough year with a bumpy start but a better ending,” Netflix said in its quarterly letter to investors, adding that it has a clear path to reaccelerating its revenue growth. It ended the year with 230.8 million subscribers worldwide.
Netflix shares are up 6.9% in after-hours trading.
Fourth-quarter revenue rose 1.9% year over year to $7.85 billion, while net income fell 91% to $55.3 million. The decrease in net income was the result of an unrealized loss on a Eurobond currency hedge, which impacted the company due to changes in currency markets.
The earnings report caps a tumultuous year for Netflix. It surprised Wall Street in early 2022 with two straight quarters of subscriber losses before rebounding in the September quarter with 2.4 million new subscribers.
The company spent much of the year focusing on launching an ad-supported tier, controlling costs, and finding ways to make money off the more than 100 million Netflix viewers who watch content on someone else’s account regard.
Ted Sarandos previously held the title of Chief Content Officer in addition to his current responsibilities as Co-CEO of Netflix.
Photo: David Swanson/Shutterstock
Netflix said it’s past the most cash-intensive phase of building its business and is now focused on generating strong free cash flow. The ad-supported tier and efforts to get paid for sharing accounts are two ways to do it.
Netflix launched its ad-supported tier of services in November, which the company said Thursday began driving “incremental membership growth.” It also said it had “seen very little switching from other plans”.
Mr. Peters played a leading role in creating the ad-supported tier. Previously, he helped Netflix’s global expansion into Japan and the gaming sector. In the blog post announcing the change in leadership, Mr Hastings said the leaders had all worked well together for years and he planned to work with them “for many years to come”.
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In another senior management change, Netflix appointed Bela Bajaria, its global television boss, as chief content officer, a title previously held by Mr. Sarandos. Scott Stuber, Head of Global Film, becomes Chairman of Netflix Film.
Mr. Sarandos was appointed Co-CEO in July 2020 and retained the title of Chief Content Officer at that time. Netflix said at the time the move was part of “a long process of succession planning.”
As Netflix ramps up its efforts to crack down on password sharing, Netflix expects it will make efforts to get more members to pay extra for the option to share their accounts with people outside of their household. That rollout will come later in the first quarter, Netflix said, and will likely result in a different pattern of subscriber growth this year.
“This will not be a popular move,” Mr. Peters said at the investor conference.
Netflix acknowledged that cracking down on account sharing could result in a loss of viewership in the short term. It expects the broader rollout of the effort to result in a pattern similar to that seen in Latin America, where subscriber retention increased over time, despite Netflix encouraging households to pay to share with people living outside the home.
The company tried to allay some subscribers’ fears in its letter, saying all members would be able to watch Netflix while traveling.
Netflix announced that its operating margin fell to 7% from 8.2% a year ago. It expects an operating margin of 20% in the first quarter, up from 25% a year earlier. The company’s margins tend to be lower in the fourth quarter because that’s where it spends most on content.
Netflix reported its first loss of subscribers in a decade in April, sending the streaming company’s shares down 35% in a single day. But after strategy shifts, Netflix added twice as many subscribers as expected in the third quarter. The WSJ looks back on Netflix’s rollercoaster year. Photo illustration: Adele Morgan
Netflix has added new subscribers in every region in which it operates. Still, average revenue per user in Asia fell for the fifth straight quarter. In Europe, the Middle East and Africa, revenue per user shrank for the third quarter in a row.
The streaming market has become more competitive in recent years. Customers have seemingly endless options and are willing to switch between services when they are done watching a particular show. Investors are also increasingly focused on profitability, which puts additional pressure on Netflix and its competitors to grow not only their subscriber bases but also the amount of revenue they generate per user.
The rate of subscriber churn or churn for subscription streaming video services rose to 6% in the U.S. in December from 5% a year earlier, according to subscription services data provider Antenna. Netflix’s U.S. subscriber churn rate remained the lowest among premium streaming video-on-demand services at 3.1% in December, though that’s higher than the 1.9% churn rate reported by Netflix, according to Antenna had in December 2021.
“Ultimately, content is the currency that streaming platforms compete for,” said Mike Proulx, research director at Forrester.
Between October and December, Netflix released several highly acclaimed shows and films, including Ryan Murphy’s The Watcher, the highly anticipated Glass Onion: A Knives Out Mystery, Wednesday, and the two-part documentary series Harry & Meghan.
Mr Sarandos highlighted the string of hits Netflix has delivered since Stranger Things season 4 landed in late May.
“When the content works, the business works,” Mr Sarandos said.
Write to Sarah Krouse at [email protected]
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