Netflix had 94.36 million paid subscribers at the end of the first quarter of 2017. It has approaching 50 million paid subscribers in the United States, just under 45 million elsewhere, and is on track to pass 100 million worldwide. However, the company failed to meet its own forecasts and is forecasting slower growth for the next quarter, so how far can Netflix continue to grow.
By any standards, Netflix is showing great growth. It added 5.81 million paid subscribers in the last quarter of 2016, while the 100 television services in the informitv Multiscreen Index rose by 4.03 million between them. Yet there are signs that the growth of Netflix is slowing.
In some ways this is inevitable. Subscriber growth invariably slows as it becomes progressively harder to sign up new customers, while churn means you have to sign up more just to maintain numbers.
For the first quarter of 2017, Netflix fell short of its own forecasts by 100,000 in the United States and a couple of hundred thousand internationally.
Netflix management sees “these quarterly variances as mostly noise in the long-term growth trend and adoption of internet TV”.
As one analyst put it in the Netflix quarterly conference call, “I know you want us to not dig into gross adds and churn on a quarterly basis too much, but it’s sort of what we do.”
Reed Hastings, the chief executive Netflix, conceded that “every incremental 10 million is a little harder than the last 10 million” but remains positive about the prospects.
David Wells, the chief financial officer, responded by saying “my God, if we can get penetration levels outside the U.S. to be anywhere close to the U.S., you’re implying multiple hundreds of millions of global subscribers.” He added, “We’ve got some markets there that are starting to get there” but he did not specify which ones were approaching anything like 50% market penetration.
As the chief executive put it, “the thing is everybody watches TV and nearly everybody has the internet, so I don’t see anything that’s going to stop Netflix from getting to most people in the United States and then eventually, hopefully, most people around the world.”
Yet international subscriber growth was down by over a fifth year on year, after launching in 130 countries in January 2016. Since then, Netflix has added 13 million subscribers outside the United States.
For the first quarter ever, Netflix saw a profit internationally, at $42.65 million. That is still less than it still makes from its legacy DVD rental business in the United States, which now has fewer than four million members. However, as it continues to invest it is expecting to make a small loss internationally in the next quarter.
Netflix plans to spend over $1 billion in 2017 on marketing to drive member acquisition.
The company appears superficially unworried by other online television services in the United States from the likes of Sling TV from DISH Network, DIRECTV Now, PlayStation Vue from Sony, YouTube TV or the planned service from Hulu. It sees them as competitors to existing pay television services.
“We don’t think it will have much of an impact on us as Netflix is largely complementary to pay TV packages,” the company wrote. “Our focus also is on on-demand, commercial free viewing rather than live, ad-supported programming.”
Netflix continues to concentrate on its user experience. It is replacing its five star ratings with the thumbs up, thumbs down model pioneered by TiVo. It says this improves feedback and personalisation, but it also helps perception. Who wants to watch a title that has only one star?
The company is also replacing still images it its catalogue with video, which it acknowledges takes judgment, creativity, and testing. Representing a title with a single promotional image is challenging. Netflix tests multiple versions to see which one works best. Creating a representative video is a skill that is understood by broadcasters and trailer producers, but has been largely lost in online video.
Netflix spends over a billion dollars a year on technology and development.
Netflix management “remain incredibly excited about the opportunity in front of us to build a truly global and durable internet TV business”.
As it is about to pass the 100 million member mark, the company says “It’s a good start”.
As far as Reed Hastings is concerned, the global internet represents “a phenomenal opportunity”.
For all it’s apparent transparency on numbers, Netflix executives appear remarkably reluctant to address the basic measure of how many people use it and for how long.
What its chief executive will say is that the company sees the opportunity of YouTube having a billion active users and a billion hours usage every day, while Netflix has about a billion hours a week.
Netflix said it reached a level of 250 million hours of viewing on a single day in January, that’s almost two and a half hours for each subscriber account, not necessarily per individual.
“Our viewing is very large and growing, but nowhere near as big as YouTube’s, so we definitely got YouTube envy and we’ve got a lot of room to go,” he said.
It might be said that neither Netflix nor YouTube currently enjoys anything like the level of viewing of traditional television.
This is simply a distraction from the competitive threat of Amazon video, which is the closest comparable competitor to Netflix. Amazon has far larger diversified revenues and is making significant investments in original productions, although so far with less apparent impact than Netflix.
In comparison to HBO, which Netflix has long seen as a competitor, Reed Hastings points out that they have continued growing modestly, while Netflix has grown rapidly.
“That’s because we’re like two drops of water in the ocean of both time and spending for people,” he said, pointing out it is not a zero sum game with only one winner. The real competition, he observed, is sleep, since we only have so many hours available to view.