Market Insight

Netflix stays on target in Q3 in the advent of Disney and Apple’s OTT offers

October 18, 2019  | Subscribers Only

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Third quarter results for international OTT subscription video leader Netflix has revealed growing paid subscriptions and revenues both domestically and internationally, with global paid subscriptions growing 4.5% to 158.3 million and revenue growing 6.7% to $5.173 billion. At the end of the third quarter, US subscriptions rose by more than half a million to 60.62 million, while international subscriptions rose by 6.8% to 97.714 million, roughly in line with Netflix internal forecasts.

Also falling into line were Netflix’s regional revenues, with the US revenue growing by nearly $115 million to $2.41 billion and international revenues growing by 8.3% ($212 million) to $2.76 billion.

Our analysis

Such growth is a welcome swing away from Netflix’s notoriously under target second quarter results and symbolises a return to growth for paid subscriptions in the US, which fell by 160,000 in the second quarter. Furthermore, despite coming in under in-house forecasts in the US by 280,000 paid subscribers (roughly 35% of forecast net additions), Netflix’s domestic revenue forecast was exceeded slightly, equating to a domestic quarterly ARPU increase of more than 4%.

The ending of price grandfathering periods in Q3 in some of Netflix’s most prominent international markets including Brazil, Mexico and German-speaking Europe cemented a solid ARPU rise of more than 3% outside of the US. At the end of Q2, price increases affected several major markets around the world, most notably in major Western European markets including France, Spain, Italy and the UK as well as Turkey and Israel. The benefits to Netflix’s revenue growth with these price increases has been made particularly clear over the course of 2019, remaining on target despite subscriber adversity.

Netflix’s domestic subscriber losses in Q2 battled not only streaming churn seasonality, but also a competitive viewership slate. The eighth and final season of Game of Thrones challenged streaming competitors with record viewership. Furthermore, Q2 traditionally faces increased fragmentation of consumer usage as the weather becomes more temperate and consumers have more forms of entertainment available to them. These challenges alongside record domestic broadband penetration encouraged Netflix to strengthen original content through H2 in order to maintain steady growth.

While Q3 was punctuated by large TV content releases including seasons 3 of Stranger Things and La Casa de Papel, season 4 of Queer Eye and the final season of Orange is the New Black, the content release slate for Q4 is poised to have a significant presence of movies, including The Irishman, The Two Popes and the already-released Breaking Bad sequel film El Camino. TV releases including season 3 of The Crown, a Queer Eye four episode special and the sixth and final season of BoJack Horseman are also set to release. This combination of new IP and long-standing content, as well as its relatively spread release schedule across the quarter will serve Netflix well in maintaining their subscriber base.

Difficulties for Netflix will come in the form of competition from Disney+ and Apple TV+, both of which are set to launch in November. Disney’s limited initial reach as well as its rumoured restricted title launch portfolio is likely to have a limited effect outside of the US, where in conjunction with its bundled strategy alongside Hulu and ESPN+ it will likely gain significant traction. Apple’s TV+ global launch, deals with third party platforms including Smart TV’s, Amazon and Roku devices as well as its bundled offer through purchase of Apple devices gives it significant initial presence around the world. However, given the nature and size of its content library, is unlikely to upset Netflix significantly.

CEO of Netflix Reed Hastings noted that upcoming streaming competition from other companies should not cannibalise other services, but rather help consumers shift more quickly from traditional linear to OTT streaming TV. He likened this to how the introduction of cable channels in the 1980s did not always take viewership from other cable channels, but from traditional broadcast channels. This outlook aligns with IHS Markit’s strong forecasts for the US online video market. Streaming competition is not necessarily isolated to paid online subscription video but is also an opportunity to bring awareness to further cord-cutting from traditional pay TV. Nevertheless, Netflix has a reduced forecast outlook for 2019, with paid subscriptions set to grow by 1.9 million fewer than in 2018 (26.7 million versus 28.6 million), owing to the uncertain nature of the fourth quarter.

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