Netflix plan for world domination must win over skeptics at home

When it releases first-quarter results next week, Netflix is expected to post 1.75 million new US subscribers, the smallest increase since 2012


The most immediate challenge for Netflix will be persuading some of its long-time customers to stick around after it raises prices next month. Photo: Reuters
The most immediate challenge for Netflix will be persuading some of its long-time customers to stick around after it raises prices next month. Photo: Reuters

Los Angeles: While Netflix Inc. executives joined actors Kevin Spacey and Aston Kutcher in Paris this week to pursue new customers in Europe, investors are looking for reassurance about what’s happening at home.

Subscriber growth in the US slowed last year, creating a new hurdle in Netflix’s quest to climb to between 60 million and 90 million domestic customers from almost 45 million now. When it releases first-quarter results next week, the company is expected to post 1.75 million new US subscribers, the smallest increase since 2012. Shares tumbled in the weeks after its last report, when US growth missed forecasts for a second straight quarter.

As Netflix spends billions on original programming to supplant traditional pay TV with its on-demand streaming, the slowing growth worries investors who use the company’s home market as a barometer for its potential outside of it. Though the world’s biggest online TV network is adding customers in Europe and South America at a rapid clip, according to analyst forecasts, the company continues to lose money overseas.

“They’ve been fueling subscriber growth through global launches, but now they’ve capped out,” said Richard Broughton, research director at Ampere Analysis. “Other than China, there are no new markets. What’s next?”

If subscriber growth continues to slow, Broughton said, Netflix’s only option will be to adjust prices, raising them in more developed countries and reducing them in others. But the company is already boosting prices next month, making the prospect of another increase more risky.

2015 darling

After delivering the best returns of any company in the Standard & Poor’s 500 Index in 2015, Netflix shares have fallen 4.1% this year. They sank 23% in the two weeks after the company’s most recent earnings report on 19 January.

The key to reaching its target in the US, Netflix’s biggest market, will be exciting new programs, according to chief executive officer Reed Hastings, who co-founded the company in 1997. Netflix has expanded its original content beyond the heady dramas and quirky comedies one finds on premium cable channels like HBO and Showtime.

Sitcom reboots

Over the past few months, Netflix has introduced “Fuller House,” a reboot of the popular 1990s show, and “The Ranch,” starring Kutcher and Danny Masterson of “That ’70s Show.” Both are multi-camera sitcoms, a genre viewers are accustomed to seeing on broadcast television, where “Full House” and “That ’70s Show” both aired in prime time.

Netflix also released new seasons of Spacey’s “House of Cards” and “Daredevil” as well as a pair of Lego animated series, two documentary series and five stand-up comedy specials.

“In a single quarter, we’re releasing more programming than most networks will in their whole year,” chief content officer Ted Sarandos said on the company’s most recent earnings call.

Netflix has had to broaden its library to reach its lofty subscriber targets, according to Rich Greenfield, an analyst with BTIG.

“If your goal is to replace linear TV, you can’t just be HBO or Showtime or Nickelodeon,” Greenfield said. “You need to be a little bit of everything.”

Sarandos’s growing investment in original programming is compensating for a shrinking catalog of content from other companies as Netflix cuts down on licensing movies. Its US catalogue has been reduced by more than 2,500 titles since the start of 2014, according to a post on the blog All Flicks.

Raising prices

The most immediate challenge for the Los Gatos, California-based company will be persuading some of its long-time customers to stick around after it raises prices next month. Netflix will boost rates by $2 a month for customers who have been subscribers for more than two years, while customers who signed up between May 2014 and September of last year will shell out an extra $1 a month. This will affect customers at different times over the course of the year.

Just 20% of those users are aware of the impending price increase, while 12% to 15% may cancel their subscription, according to a survey by JPMorgan Chase & Co.

The adjustment will have some effect on Netflix’s business, but not a dramatic one, according to JPMorgan’s Doug Anmuth. He reduced his projections for Netflix’s subscriber additions in the second quarter by 404,000.

The price increase will have a more positive effect on Netflix’s bottom line. The company has reported higher profits from its domestic streaming business every quarter since it broke the division out in 2011.

Global losses

Netflix has generated more sales per paying user—customers pay different rates based on whether they chose high definition and other extras—in every quarter over that span. It must continue to do so to deliver on Hastings’ promise of meaningful profits in 2017. That won’t come immediately from Netflix’s international operation, which lost $109 million in the fourth quarter of 2015 and is projected to be $114 million in the red in the first quarter of this year.

Netflix says it’s profitable in territories where it has operated for at least a few years, such as Canada, the UK and Scandinavia. The plan is for most countries to resemble the profitable model in the US. The company has about 30 million international subscribers.

“This doesn’t need to be done immediately, but it’s something they are thinking about,” Broughton said. “If they do want to keep that growth rate up and hit the larger markets, they need to think about how they can target a wider audience and improve that local catalog.” Bloomberg