The best way to get investors to stop focusing on something is to stop telling them about it at all.
Netflix It said Thursday that it will no longer announce quarterly membership numbers and average revenue per membership starting in the first quarter of 2025.
This is a big change for the company and for the so-called “streaming wars,” which have been largely defined by the race for customers. Netflix wants investors to judge the company by the same metrics that executives see as “our best proxy for customer satisfaction,” the company said in its quarterly letter to shareholders.
These are: revenue, operating margin, free cash flow – and the amount of time you spend on Netflix.
It's also a sign that Netflix's second wave of subscriber growth may be coming to an end. The company announced it added 9.3 million subscribers in the first quarter of the year as it kicks off its global password-sharing campaign and introduces a lower-cost advertising tier. (The ad tier costs $6.99 per month in the US compared to the Standard plan of $15.49.)
The company said in the letter that subscriber growth in the second quarter will be lower than in the first quarter due to “seasonality.” This may be the beginning of a longer period of slowdown in subscriber additions, as most free password sharers are now paying customers.
ARM, which Netflix defines as “streaming revenue divided by the average number of paid streaming memberships divided by the number of months in the period,” rose just 1% year over year in the quarter.
Netflix shares fell 4% in after-hours trading, partly due to a weaker full-year revenue growth outlook than some analysts expected. Netflix expects revenue to grow 16% in the second quarter, but only 13% to 15% for the full year.
Investors typically don't like less transparency. It's especially noteworthy that Netflix is cutting back on granular membership information, which the company has prided itself on — including offering more specific regional breakdowns than all of its competitors. Apple and Amazon have never provided quarterly information about subscribers to their streaming services.
However, forcing Wall Street to focus on revenue and profits, rather than user growth, is also evidence of Netflix's maturity as a company. For more than a decade, the streaming device has been seen as a nuisance to legacy media.
Now, after about five years of the “streaming wars,” Netflix is the dominant company.
“In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential,” Netflix said in its shareholder letter. “But now we're generating very significant profits and free cash flow (FCF). We're also developing new revenue streams like advertising and additional member features, so memberships are just one element of our growth.”
“In addition, as we have evolved our pricing and plans from one tier to multiple tiers with different price points depending on the country, each additional paid membership has a completely different business impact,” the company added.
Netflix has the luxury of focusing on profit, revenue, and free cash flow because the company's finances are healthier than most legacy media companies. For example, year-over-year revenue was up 15%.
Operating income grew 54%, and operating margin increased 7 percentage points to 28%. These gains far exceed companies such as Warner Bros. Discovery, Disney, Paramount Global And ComcastNBCUniversal, which has loss-making (or barely profitable) streaming services and a declining traditional TV business.
This calls into question whether other media companies will follow Netflix's lead and stop reporting subscriber numbers for their streaming services. Not many legacy media companies started their own password-sharing campaigns like Netflix. This could mean that they have more growth in the future, which is what investors would probably want to see.
“We have evolved and we will continue to evolve,” Netflix co-CEO Greg Peters said during the company's earnings call. “This means that the historical calculations we used to make are becoming increasingly less accurate” in assessing the business case, he added.
Disclosure: Comcast NBCUniversal is the parent company of CNBC.
