Netflix’s fourth-quarter subscriber results topped expectations, but concerns over market saturation has investors rattled.
The streaming behemoth added a record 5.59 million total streaming members during the quarter, for a total of 74.76 million globally. Impressive, but most of the growth came from the subscription video-on-demand (SVOD) giant’s international expansion.
Despite the success of the original series Narco and Marvel’s Jessica Jones in the United States, Netflix missed US growth forecasts, adding just 1.56 million subscribers. That’s a decline from the 1.9 million it added domestically in the year-ago period. “The next 50 million is a little bit harder than the first 50 million in terms of growth,” David Wells, Netflix’s chief financial officer, said during an earnings call.
“While Netflix is no more transparent about its business model than its ratings, most observers (TDG included) believe the former depends heavily on a steady stream of new subscribers,” said TDG Research analyst Alan Wolk, in a research note. “That explains why the service can continue to charge US subscribers only $9 per month while spending millions on original content. Eventually that untapped pool of subscribers is going to run out, as recent numbers from Australia and the US suggest. That doesn’t mean Netflix will lose subscribers, only that subscriber growth will slow.”
In addition to market saturation, Netflix faces resistance from content push-back. Many networks are now re-evaluating their deals with Netflix for its library content, which may reduce Netflix’ content proposition. That would put more of an onus on creating original content - not happy news, considering that Q4 total profit showed the company’s global expansion costs taking their toll. It slid to $43.2 million, a 48% drop from a year earlier.
“TDG has no access to the private company’s ledgers and no idea what those numbers look like,” Wolk said. “That said, if Netflix charged $15 per month for its base service revenue would increase 67%, so we’d wager a domestic price increase would pretty much solve any short-term revenue issues.” And if it doesn’t, the company could introduce advertising, akin to a Hulu two-tier system with a higher monthly price point (say $19.95) that allowed viewers to continue with the old ad-free model, and a lower price point (say $9.95) with a limited amount of advertising baked in.
“Whichever method Netflix chooses to eventually implement, its low initial pricing most definitely helps it continue rapid subscriber growth,” Wolk said. “If subscribers are pleased with the breadth of its syndicated collection and quality of original programming, then Netflix should be able to raise prices and introduce advertising without a significant falloff in subscribers.”
Seeking Alpha columnist Bill Maurer took a slightly different tone, noting that beauty is in the eye of the beholder when it comes to outlook. “The Q4 report didn't really change anything,” he argued.
“Total sub growth is slowing, while the segment is becoming more profitable. Netflix already has a large subscriber base, so it's reasonable to expect smaller sub gains. One of my 2015 predictions was that we'd see less than five million domestic streaming sub adds, and I feel confident in that.”
Maurer also noted that contribution margin per sub has risen by over $4 since Q1 2013. “For those that question rising content costs, Netflix continues to improve the bottom line in the US streaming segment, and management reiterated its 40% target for contribution margins in this segment by 2020,” he noted. “In Q4 2015, Netflix was at 34.3%, up 530 basis points in the past year.”