Netflix’s fourth-quarter earnings reported impressive international growth, adding 8.3 million paid subscribers outside the Unites States, beating top and bottom-line estimates for the quarter, and clocking 8.6 million subscribers globally. However, the streaming giant’s problems at home continue to compound as this marks the third quarter that Netflix (NFLX) has fallen short of domestic subscriber forecast.
While king of the streaming hill globally, Netflix added just 420,000 paid net US subscribers, below its guidance of 600,000 for the quarter. This was Netflix’s first earnings report since the launch of new streaming rivals Disney+ and Apple TV+ last November. The stock rose more than 2% in after-hours trading on Tuesday evening.
The quarterly release also included disappointing guidance for the first quarter, reflecting the looming threat of its rivals’ local and international expansion.
In a letter to shareholders, Netflix said last year’s price hike and growing competition created a drag on membership growth in the US and Canada.
In Canada, Netflix added 125,000 paid subscribers. That was more than in the 96,000 it added in the third quarter, but a dramatic reduction versus the 218,000 who signed up in Canada in the fourth quarter the year before.
Pricing a key piece of puzzle
The fourth quarter results bring the spotlight sharply back on the issue of the streaming behemoth’s pricing structure. Netflix faces challenges on both pricing and content frontiers as the streaming landscape erupts in a noisy war with large, well-funded players like Apple and Disney launching streaming services at price points significantly lower than Netflix’s $12.99 monthly subscription fee.
With more streaming services -- Peacock from NBCUniversal and HBO Max from AT&T’s WarnerMedia, for instance -- slated to join the fray this spring, there is potential for competition to eat up a sizeable portion of Netflix’s lunch.
Given the miss on subscribers in the US, some believe Netflix may be compelled to make price adjustments to retain and regain consumers and prevent more attractively priced rival services from peeling away its viewers.
“This price differential will cause lower subscriber growth than we had previously expected,” says Morningstar equity analyst Neil Macker, in an equity report. “We expect that competition with lower-price plans will test the price sensitivity for [Netflix’s] core users.”
Trimming subscription fees is not new to Netflix. The streamer has already done that in India, its key test-bed, and has tasted success in a highly cluttered market teeming with regional and global players and their pocketbook-friendly plans.
Last year, Netflix introduced a $3 per month mobile-only plan in India. The move proved to be a hit, prompting the company to roll out a similar plan in Malaysia a few months later. “We’ve been very happy with the mobile plan [and] it’s actually performing better than we tested,” said Gregory Peters, chief product officer at Netflix, on the earnings call last quarter.
Later that same year, Netflix rolled out longer subscription plans in India offering discounts up to 50%.
Netflix did not immediately respond to an email asking if similar plans might be launched in the U.S. and other mature markets including Canada.
The devil is in the data
There are data linking Netflix’s subscriber growth in India to its cheaper plan. “What we see in India with regards to Netflix is that daily active users have been picking up since they launched their new pricing in July last year,” said Ed Lavery of SimilarWeb, a UK-based mobile analytics firm. Based on the Indian example, Lavery added, one could deduce pricing changes are successful.
Most recent data collected by SimilarWeb show Netflix app’s daily active users fell an estimated 3% internationally and nearly 6% domestically, prompting Lavery to predict “it’s going to be a challenging environment for Netflix.”
Unless Netflix drops its pricing, the subscriber churn could get worse, says Needham analyst Laura Martin. As Apple TV+, Disney+, HBO Max and Peacock stream into the subscription video on demand (SVOD) market with cheaper options, Netflix’s valuation multiple will plummet, due to “falling US subs and lower lifetime value per subscriber as content costs and churn rise,” she said.
More competition can increase content costs. Netflix is already experiencing that, “as management indicated that the cost to develop premium content has increased about 30% over the past year,” said Macker. The company splurged more than US$14 billion on content in 2019 and reported negative free cash flow of US$1.7 billion for the fourth quarter, projecting negative free cash flow of about $2.5 billion for 2020.
Binge- watch and bolt
Martin forecasts Netflix’s rate of attrition in the US will get worse in 2020 when competition intensifies. However, there’s another kind of self-inflicted pain with which Netflix must contend: the binge-watch Frankenstein.
“Because binge watching is so prevalent and easy on Netflix, viewers watch Netflix’s library faster, and run out of things to watch,” said Martin. “The more hours a household watches Netflix, the faster Netflix value proposition falls and the lower the probability of subscription renewal.”
Netflix has no annual contracts, so consumers can cancel their subscription at any time, with no penalty. Viewers may pay for one month and binge-watch their favourite Netflix original programs or new seasons and then cancel their subscription.
A far more effective retention tool could be a lower-priced plan. To be precise, a $6 monthly service subsidised with commercials, said Martin. Such a plan would offer consumers a “price to value ratio comparable to other OTT entrants that have expensive originals, large content libraries, and strong free cash flow,” she argued.
In 2021 Martin predicts the subscription video on demand (SVOD) price wars could go global as Netflix rivals expand their services internationally.
With files from the Canadian Press