Netflix sheds subscribers shock headlines shook its share price and valuation. After an apparently inexorable rise, the number of paid Netflix subscribers in the United States fell by 126,000 in the second quarter of 2019, although there are still over 60 million. Netflix added 2.83 million subscribers elsewhere and gained 2.70 million overall, a lot fewer than it had forecast, as it broke through the 150 million mark. Netflix now faces a problem common to all subscription services— churn.
Every quarter since 2011, Netflix has reported a steady rise in subscriber numbers, and has been appraised on how much it exceeded or fell short of its own targets for gains.
Netflix had forecast that it would end the first half of 2019 with 60.53 million paid subscribers in the United States, a gain of 0.3 million, which was significantly lower than for previous quarters.
When it came in at 60.10 million, a net loss of 0.13 million on the previous quarter, the disappointment was palpable.
It was something of a shock to the market when Netflix reported that it had actually lost subscribers in the United States and its share price was punished accordingly, losing $16 billion in valuation.
Of course, Netflix loses subscribers all the time, but it has tended to gain more than it has lost, resulting in net subscriber growth.
A net loss of 126,000 subscribers was just 0.2% of its base of over 60 million in the United States.
The problem is, the more subscribers you have, the more you have to sign up to overcome inevitable subscriber churn.
If you have 60 million subscribers and your churn rate is say 10% a year, that is six million new customers you need to find just to maintain your numbers. There are only so many new customers to in a market like the United States, so it inevitably becomes harder to sustain growth.
It does not help when you put the price up. Once an affordable addition to other forms of television and video, a Netflix subscription now costs $9 a month for a basic subscription and $13 a month if you want to watch in high definition which you probably will, or $16 a month if you want watch in ultra-high-definition, which you will if you can.
While Netflix had a net subscriber gain of 2.83 million subscribers outside the United States, that was significantly lower than the 7.86 million in the previous quarter, or the 4.58 million in the same quarter a year previously, and short of the 4.70 million it had forecast.
All of which rather overshadowed the news that Netflix had passed the 150 million subscriber mark globally, with a total of 151.56 million, of which over 60% are now outside the United States.
But the United States matters, at least to people in America, and the fallibility of the Netflix forecasts suggests that it underestimated how price sensitive they are. That was apparently priced into the lower forecasts projected by Netflix management, but not enough. With competition coming from Disney+, starting at $6.99 a month, Netflix faces further challenges ahead.
Nevertheless, Netflix expects to grow subscribers by 7 million in the third quarter of 2019, including 0.8 million in the United States, which is more than the 6.1 million globally in the same quarter the preceding year.
Netflix attributes the slower growth not to pricing but notes that with 9.6 million additions in the first quarter of the year this may have reduced the number joining in the second.
The chief financial officer also noted “elevated churn rates and lower retentions” but focussed on the benefits of increased pricing producing more revenue. “So while there may be some short-term slowdown in subscriber growth because of pricing, that increased revenue is very good for our business and ultimately for our members because we reinvest the bulk of that back into great content and great product experience for our members.”
The company is also clear that it will not introduce advertising, as competing for viewer satisfaction will make it a more valuable business in the long term.
Reed Hastings, the co-founder and chief executive of Netflix, remains confident in long-term growth, noting that excluding China there are around 700 million households that pay for television.
“So we’ll just take it year-by-year and try to have our net adds continue to grow,” he told analysts. “We still think our net adds this year will be larger than last year. We’ll keep pushing on that. And what we want to do is just grow the net ads every year and then the future takes care of itself.”