Netflix’s Miss and Looming Competition

There were mixed reactions to Netflix’s earnings yesterday, largely on the news they missed their own internal subscriber growth forecast as well as losing US subscribers for the first time. For the bears, this news signaled the trend they have been predicting. For the bulls, they buy Netflix’s story that the price hike and global climate were the reasons for the miss. Management is staying bullish for Q3 that they will hit their global growth estimate of 7m.

Services Potential for Seasonality
With all the pros of on-demand subscription services, a potential negative could be the seasonality. Particularly, the concern that any service is only driving interest and loyalty for a few shows, and after fans watch those shows, they cancel their subscription. This is the argument for HBO’s strategy to release shows weekly vs. Netflix’s to release a show all at once. The all at once, binge potential means a fan can subscribe, binge their show, then unsubscribe quite easily.

Looking at some metrics research, it looks as though HBO had just this seasonality dynamic hit them around Game of Thrones. New subscribers of HBO Now were up 53% in April and then steadied out the following months. This suggests consumers subscribed for GOT and then canceled when it was over. This was not a massive wave of people. However, it was enough to show up in the data tracking research.

Seasonality is something services like HBO Now, Netflix or any other subscription service need to worry about. It’s just as easy to cancel as it is to sign up, and if consumers are only interested in a few shows, then seasonality could become an issue. This should also concern Netflix given they are losing Disney, Friends, and the Office. As networks decide to create their own subscription services, it is likely they will not renew the deals with Netflix for their most popular shows in order to have them for their own subscription service.

Netflix understands this is, which is why they are investing in an attempt to have 1-2 new original content productions launch each month. Netflix knows it always needs to have something new for its customer to watch if it wants to become the dominant streaming entertainment service.

Looming Competition
Netflix’s letter to investors did not seem to be too concerned about competition. And I’d agree that was not a factor here, yet, and it is an open question as to how much competition impacts Netflix if at all. Early research from UBS suggests interest in Apple TV+ and Disney+ is extremely high. Forecasts for Disney Plus+ is to get to 60m by 2023. Netflix has 60m US subscribers right now, and that equates to roughly ~70 of US households. Basically, Disney+ will have the same number of US subscribers by 2023.

My conviction remains consumers are not going to ditch Netflix to subscribe to things like Apple TV+ or Disney+. These will all be additional subscriptions to Netflix as a part of a broader set of services consumers subscribe to. Our first research study on consumer subscriptions services revealed high interest to switch away from cable or satellite TV bundles. We found that 48% of US consumers are spending $80 a month or more on cable or satellite TV bundles. My conviction is consumers will shift that $80 or higher budget to other subscription services as they move away from cable bundles not look to switch to in order to lower costs.

The benefits of this are you get more value for the monthly money you spend since you have handpicked the things that matter most to you content-wise, when we looked at consumers, who had already canceled cable/satellite and moved to stream services on average spent more and subscribed to more services than those who still had a cable or satellite bundle.

Given Netflix’s high household penetration in the US, growth is going to need to come from other markets. However, the budget opening and upside for other services like Apple TV+ and Disney+ seem clear. The main question is which, and how many streaming services consumers will find value with, but I have little doubt Netflix will remain one of the primary ones.

Looking at Netflix data in Second Measure, which tracks a large portion of their user base via credit card transactions, it shows that overall Netflix’s customer retention is extremely high. Average transaction value is increasing, meaning even as Netflix raises prices, customers stay loyal. But it does show the last two years new customer growth in the US has slowed dramatically. Which does tell you they have nearly saturated the US market, and the only way to grow revenue in the region is to keep raising prices.

With the budget shift dynamics I explain, I’m not sure that will become as big of an issue as long as they keep their content frequency and quality high. For Netflix, they need to cement themselves as the service where most TV and movie content is consumed, and if they do that they have more share of wallet, they can acquire.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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