Netflix (NFLX 2.20%) just turned in a stellar first-quarter report, but the most surprising part of the earnings wasn't in the headline numbers.
Instead, it was management's decision to stop reporting quarterly subscriber numbers, which marks a fundamental shift in how investors may view the business.
For years, subscriber growth was the benchmark Netflix was judged by. The stock has a history of swinging wildly based on its quarterly subscriber growth and how it compares with management's own guidance and investor expectations.
Netflix stopped providing subscriber guidance last year because management believed it was no longer as relevant to understanding the business as overall revenue growth. That move foreshadowed Thursday's decision to stop reporting the metric entirely starting in 2025.
Image source: Netflix.
Why subscriber growth isn't so important
Companies' decisions to stop reporting key metrics often look like obfuscation. Certain metrics might make the company look bad from time to time so management would rather not report them. For example, some companies in the retail and restaurant sector, for example, have stopped reporting monthly comparable sales, to the chagrin of investors looking for updates more frequent than each quarter.
However, Netflix's decision to back away from subscriber numbers seems justified. The business model has changed substantially in the last few years with the launch of its ad-supported tier and the crackdown on password sharing. It has multiple ad-free tiers now across a wide price range, plus an extra member option.
That means Netflix has several ways to monetize users who pay a broad range of prices, including ad revenue.
Additionally, Netflix says it's more focused on engagement rather than individual subscriptions, as it sees engagement as the best indicator of future growth and success. A highly engaged subscriber to the ad-supported tier, for example, will monetize at a higher rate than one who only watches a few hours per month since advertisers pay to show them ads.
Why it could be a win for the whole streaming sector
After stumbling in the aftermath of the pandemic, Netflix has regained its mojo thanks to the launch of the ad-supported tier, the paid sharing password crackdown, and a normalization in streaming demand.
The company has just reported its best four quarters of subscriber growth in its history, excluding the pandemic, and it delivered its best operating margin on record in the first quarter at 28.1%.
Most of Netflix's legacy media peers are struggling in their transition to streaming, but the company's decision to stop reporting quarterly subscribers could help by giving them cover to do the same. Quarterly subscriber growth is notoriously volatile, and Netflix stock has plunged several times in its history over one quarter of results only to bounce back the next as subscriber numbers improve. Quarterly subscribers can be influenced by new content on the platform, competitive actions, or other television events such as the Olympics.
Focusing on revenue growth instead smooths out growth over an entire year in a subscription model rather than just the number of net new subscribers that joined a service in a given quarter.
Netflix's competitors, including Disney, Warner Bros. Discovery, and Paramount Global, have all reported weak subscriber growth recently, but persuading investors to judge their efforts on financial metrics such as revenue growth and operating margin could make those businesses look better. And it's easy to do when they have a history of copying each other's moves by launching their own ad-supported tiers or cracking down on password sharing.
It's unclear if these competitors will take the opportunity to pull back from subscriber growth reporting, but doing so might be in their interest as the other numbers are less volatile.
Once again, Netflix is setting the standard in the streaming industry, but its peers can also benefit from its latest decision. Shifting the focus away from quarterly subscriber growth could be a win for the entire streaming sector.
