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Netflix and S4 Capital grapple with content issues

Is there any connection between last week's profit warning from S4 Capital (SFOR) and news that Netflix (US:NFLX) was hastening moves to establish a lower-cost, ad-supported subscription tier? Well, beyond an existing contractual relationship, you might argue that it shows two businesses struggling to optimise commercial models in industries that have been drastically altered by digital transformation.

Investors in Martin Sorrell’s new-age advertising outfit were spooked by news that rising staff costs at S4’s content division had outstripped sales and profit growth, leading to reduced profit guidance for 2022 and a freeze on hiring. It may be too much to expect greater working capital discipline from the company given the acquisition spree undertaken since it started trading in 2018. Yet it does raise concerns as to whether the rush to build scale has been pursued at the expense of margins.

The agency’s three-year business plan (2022-24) is targeting a like-for-like doubling in revenue and the restoration of cash margins to previous levels. The rate stood at 18 per cent for 2021, representing a  three percentage point decline on the prior year, although that was largely the result of acquisition costs.

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