Netflix (NFLX 2.90%) disappointed investors when it reported just 4 million net subscriber additions in the first quarter. Perhaps more disappointing was management's outlook for just 1 million more subscribers in the second quarter.
Some investors are concerned that competition is having an effect on Netflix's subscriber growth despite management's commentary to the contrary. One area where Netflix trails competitors like Disney (DIS 1.84%) and AT&T's (T 1.67%) HBO is in its marketing spend, which some may see as a source of subscriber growth weakness for Netflix.
Everybody but Netflix is spending more on marketing
Netflix's marketing expense dropped 16% in 2020 despite increased competition in the space. The line item was up less than 2% in the first quarter of 2021 versus a year ago.
Those numbers are reflected in U.S. TV ad impression numbers. Disney promoted Disney+ and Hulu heavily during the pandemic. Advertisements for those two streaming services were the most viewed in the U.S., according to data from iSpot.tv. HBO put a significant advertising push behind HBO Max as well, ranking eighth among streaming services. Netflix ranked 16th, behind names like Quibi. TV viewers saw just 3% more advertisements for Netflix in 2020 than in 2019.
That trend continued into the first few months of 2021. Netflix had the 19th most TV ad impressions of all streaming services from Jan. 1 through April 15 this year.
Netflix's advertising is different
When Netflix increased its advertising budget by 50% in 2018, only a small minority of its marketing spend was on direct acquisition and general brand building. Then-CFO David Wells said between 80% and 85% of its marketing was on building title brands, i.e. its original content. By 2021, it's a good bet that percentage is even higher, as Netflix has grown its brand awareness around the world.
By comparison, advertisements for Disney+ or HBO Max are just as often focused on the brand and service itself as they are on a specific title available for streaming. Even Disney's ads for Hulu -- which has been around just as long as Netflix's streaming service -- are still often focused on the library of entertainment available on the service rather than any specific title.
So, when the pandemic hit and everyone started signing up for streaming services, Netflix was the default option. Netflix didn't need to increase advertisements to let people know they can replace linear TV, movie theaters, or sports entertainment by subscribing to its service.
But now, Netflix enters 2021 with limited original releases to advertise. And that dearth of new titles will continue through the first half of 2021, management says. As a result, investors should expect marketing spend to remain low in the second quarter.
Lower marketing spend isn't a bad thing
Over the last four quarters, Netflix spent about $2.2 billion on marketing. By comparison, AT&T spent $1.4 billion on marketing HBO. Keep in mind, HBO Max didn't launch until May last year, and it's only available in the U.S. right now.
In that same period, Netflix has added 25 million global subscribers versus HBO's 10 million. That indicates much stronger marketing efficiency for Netflix. Disney likely has Netflix beat, considering its huge subscriber growth over the last year, but it's also building from a smaller base.
While Netflix was very efficient with its marketing budget during the pandemic, that doesn't mean spending more would've translated into greater subscriber growth. Keeping spending aligned with new title releases has been a winning formula for Netflix.
In the meantime, as Netflix works to replenish its original content pipeline, investors benefit from the improved operating margin afforded by management's prudent marketing decisions. It's hard to complain about a couple of quarters of slow subscriber growth when the company's printing cash.