Netflix added more than 10 million paid subscriptions and generated more than $6.1 billion in revenue in the second quarter of 2020 as countries around the world continue to be subject to lifestyle changes as a reaction to the COVID-19 pandemic. These results mark more record growth for the global streaming video giant, second only to their first quarter 2020 results where Netflix added 15.77 million paid subscriptions.
The ongoing impact of the COVID-19 pandemic on Netflix’s performance is a function of all its individual market’s government policies and consumer responses regarding contagion limitation. The spectrum of case profiles by country is extremely broad with major video markets scattered across the board. Through stringent regulation or otherwise, Asia-Pacific markets in particular such as Australia, South Korea, Indonesia, Japan and China have kept normalised infection rates low and are returning to relative normality faster than markets such as North America, Brazil, India, Russia, the United Kingdom and mainland Europe. Punctuating various policies however is the subsequent citzen response which is frequently seeing real consumer habitual change misaligned with the implied impact of local policies.
Regionally, UCAN was the only region where Netflix added more subscriptions in Q2 than in Q1 (2.9 million and 2.3 million respectively). This reflects the severity of the pandemic in the US which now accounts for more than a quarter of global cases with the infection rate continuing to rise. As a result, the effects on the economy and video specific markets may amplify further with the consequences continuing to be felt well into the remainder of 2020 and beyond. UCAN accounts for more than 45% of Netflix’s revenue and continues to be the most profitable region per subscriber, with Q2 US dollar ARPU 26% higher than the next most profitable region of EMEA. Netflix may still see further gains as a result of the pandemic but its ongoing impact on local content production will also be increasingly amplified, with the fallout potentially only manifesting in 2021 given Netflix’s long production lead time.
Latin America is now home to 18.7% of Netflix’s subscriptions but just 12.9% of its revenue and was the only region to experience both a quarterly revenue and ARPU drop in US dollar terms in Q2 2020. Exchange rate instability is the primary cause for this drop, with the Brazilian Real, Mexican and Argentina Peso all loosing between 15-24% of their value compared to the US dollar over the course of 2020. These woes are not new to Netflix however as such fluctuations have caused similar revenue dips in the past. Latin America is home to 18.7% of Netflix’s subscribers but just 12.9% of revenue. This issue will likely be an ongoing battle for Netflix and indeed any international or US dollar-based operator in the region. Netflix’s efforts will have to be increasingly localised in markets with such issues, although this will be exceptionally challenging in 2020 given the current localised COVID situation as well as a potential impeding recession.
In constant YoY currency terms, Netflix ARPU in Asia Pacific is growing the slowest compared to the other regions (1% vs 6-13%). This combined with the impressive growth rate in paid subscriptions (13.4% vs 4-5% for all other regions) indicates increasing uptake of Netflix’s significantly cheaper mobile offers which are now available in five countries, namely India, Indonesia, Malaysia, Philippines and Thailand. Omdia expects this package to expand to more countries later in the year, particularly given the implications of the pandemic on global economies. This combined with an increasing array of partnerships and product integrations is set to sustain Netflix subscriber growth at the cost of revenue with the aim of longer-term gains at the hands of increased market share, better consumer retention and upscaling potential.
As consumers in certain markets emerge from the peaks of their country specific lockdowns and as restrictions on movement and gatherings are lifted, Netflix and indeed all OTT video services will see increased churn and reduced overall usage. Netflix indicated that the peak of 2020 subscriber net additions to date came in June following subscription growth triple that of pre-COVID acquisitions, with subscriptions beginning to dip in July. With COVID cases seeing localised rises around the world as countries ease restrictions and particularly as international travel begins to return, the path of the pandemic is still relatively unstable. Netflix internal forecasts A return to relative normality could still be far away and is increasingly likely to be behind a second peak, coupled with a return to more heavily restricted consumers in need of home entertainment content.