Netflix subscriber growth in the third quarter failed to match its own forecasts, falling short by half a million. The company has 66 million paid subscriptions around the world, an increase of 3.3 million in the last quarter. It has 42 million subscribers the United States, where it gained over a million but still disappointed investors. So how strong is the movie house of credit cards?
Total global subscriptions, including those in a free trial period, grew by 3.62 million to 69.17 million members compared to prior year growth of 3.02 million and a forecast of 3.55 million. Netflix said its forecast was its most accurate yet.
Yet is was the weakest third quarter growth for Netflix in the United States since 2011, gaining 1.01 million, compared to 1.18 million in the same period the previous year.
Netflix attributed the reduction in subscriber additions in part to the transition to chip-based credit and debit cards producing “involuntary churn,” meaning some subscribers dropped out because previous card numbers were no longer valid.
The explanation failed to satisfy some observers and investors, wiping almost 10% off the value of the company, although it was still trading at twice its value of a year previously.
The company says it expects to finish 2015 with 43.37 million paid subscribers in the United States, which is 5.67 million more than at the start of the year.
David Wells, the chief finance officer, told analysts he still expects the total addressable market in the United States to be 60 to 90 million.
There is more scope for global growth. Netflix has gained 9.56 million international subscribers in 12 months.
As far as the United States is concerned, Reed Hastings, the chief executive of Netflix, declared: “internet TV is better than linear TV.” He said: “on demand is a better experience than linear. And the entire market is going to move from linear to on demand, internet television, over the next 10 to 20 years.”
Addressing concerns that Netflix may find it more difficult to licence programming from studios, he said the company was hoping to create “incredible movies that are highly original and premiere on Netflix as well as in the movie theatre simultaneously”. He said this would create more desire and consumer awareness than through non-exclusive licensing of movies.
The modest start to this ambition is the simultaneous release of Beasts of No Nation in movie theatres and on the online platform.
Although Netflix is continuing to increase its expenditure on licensed programming, the investment in original production is growing faster.
As Ted Sarendos, responsible for programming as chief content officer, observed: “for the cost of production, you have full exclusivity and global rights in perpetuity versus very a narrow window a year after it’s released in the theatre in one territory.”
He also indicated an interest in moving into other formats, such as a weekly talk show, in addition to movies and television dramas with a long shelf life. But he said the company was not anxious to become an “irrational bidder” for sports rights.
“We’re interested in being able to improve the viewing experience, whatever kind of content people are watching, ” he said. He put the probability of competing with Vice news within two years as “high”.
Netflix will finally sell subscriptions to iPhone users through in-app purchases, although the company would not comment on whether that meant it was paying a 30% commission to Apple.
Reed Hastings seems unperturbed by competition from streaming services from other service providers. “It’s been our main message for several years that what is known as channels is going to become apps, and that all of these providers need to have great apps, on a phone, on a tablet, on a TV.” He suggested it was important to have standout shows: “what we’re focused on, how do we have more incredible shows”.
Tim Cook, the chief executive of Apple, also believes the future of television is apps. There may still be a role for bundling them into an overall service proposition, but Netflix wants to ensure that “lots of the viewing for movies and TV shows is through Netflix”.
“I could imagine future bundles emerging, once there’s a whole bunch of apps,” the Netflix chief executive envisaged. Over the coming years he expects there to be multiple discrete offerings. “I think everyone’s just racing to make a great app,” he said. As the market matures, he can foresee consolidation, with acquisitions and bundles. “So we’ll be open minded, but our instinct is, focus on making Netflix the passion brand in this space.”
Netflix is evolving its business from disruptive distributor to become a producer, but the multi-billion dollar question is whether its investment in original programming will make it more than a just another HBO, or whether it will end up as an app, rather than a channel, on other platforms.