Why Netflix Hasn't Peaked Yet – Despite Lackluster Subscriber Growth

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Why Netflix Hasn’t Peaked Yet – Despite Lackluster Subscriber Growth

Its “treasure trove” of data is one reason it’ll continue to sit atop the streaming food chain, one analyst says

Is this the peak for Netflix?

The company is at 195 million subscribers and counting but some question whether its dominance over the streaming landscape has crested.

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To most analysts, the answer is a firm “no,” even after Netflix fell short of both Wall Street’s and its own Q3 subscriber estimates recently. The belief is that thanks to Netflix’s mountain of original content, first-mover advantage, and emphasis on growth outside the U.S., it’ll continue to lead the pack for years to come.

Netflix “has invested billions in producing original content and licensing Netflix exclusive content, which makes up as much as 40% of its content hours in some markets, and is expected to increase its investment in originals fourfold by 2025,” Ampere Analysis analyst Tony Maroulis said.

Those originals — from “Tiger King” to “Stranger Things” to “Ozark” — have helped set Netflix apart, Maroulis said, and will continue to keep subscribers locked into their monthly payments. Perhaps even scarier for its competitors, Netflix may get better at producing content its viewers want in the years ahead.

“The head start that Netflix has on its competition means that it has a treasure trove of data,” Maroulis added. “It understands better than anyone else what kind of content it needs to produce to retain its existing subscribers, as well as attract new ones.”

That may be the case, but wasn’t Netflix’s Q3 report a bad sign? The company added only 2.2 million new customers during the third quarter, compared to the 2.5 million the company had projected. (Analysts had viewed that as a conservative estimate, with most looking for between 3 million-3.3 million new customers.) But that shortfall, analysts said, is actually Netflix being the victim of its own success.

“Netflix has had an outstanding year, and many people don’t understand that the 2.2 million net new Q3 subscriber result was actually quite good,” Pivotal senior analyst Jeffrey Wlodarczak said.

Wlodarczak pointed out that Netflix added 26 million new subscribers during the first half of the year, becoming the go-to streaming service for many people during COVID-19 lockdowns. While its Q3 subscriber numbers fell short, the company is still well ahead of where analysts would have expected the company to be at this point in the year, Wlodarczak added.

Maroulis made a similar point, saying “Globally, Netflix has added over 28 million subscribers in the first three quarters of 2020, compared to 19 million in the first three quarters of 2019, an increase of around 50%.”

Still, with COVID-19 restrictions easing around the world during the quarter, some viewed it as a sign Netflix’s strength will be diminished if or when a vaccine is available. The reasoning makes sense: people will want to finally go outside and go to events, rather than continue sitting on the couch and streaming.

“A COVID-19 vaccine would presumably lower household interest in staying in their home cocoon. This cocoon was a benefit in [the first half of the year]  in particular,” Alex DeGroote, head of DeGroote Consulting, said.

That could lead to a slight dent in hours spent streaming. It’ll also be worth monitoring how subscribers react to Netflix hiking prices again last week, with its most expensive tier now costing $17.99 per month. The last time Netflix raised its prices, in mid-2019, the service lost 130,000 domestic subscribers the following quarter — marking the first time it lost U.S. customers since 2011. Still, a subscriber exodus from Netflix doesn’t look likely.

For one thing, Netflix is an incredibly sticky product, with the company’s churn rate hovering between 2-3% for the last two years, according to Antenna Data. That’s the lowest of any streaming service around. Services like Disney+ and Hulu, for comparison, have a monthly churn rate of around 5-6%. This goes back to Netflix’s content slate — subscribers are more willing to keep their Netflix accounts because they’re either waiting for a show to return or because they’re open to trying new original content. Netflix has earned the benefit of the doubt from viewers that other streamers are aiming to achieve themselves.

“As a rule of thumb, most households will pay for three ‘on-demand’ services,” DeGroote said. “Netflix will always figure in this Top 3.”

Analysts also look at Netflix’s price hike as a move that reinforces its dominance. The added revenue allows Netflix to invest in more shows viewers want to watch, something that ultimately makes it harder for customers to ditch their service, barring an obscene price hike.

Here’s how the streaming landscape looks right now: Netflix holds a healthy lead over Amazon Prime Video, which has about 150 million subscribers. (This figure is augmented by anyone signing up for Amazon Prime also getting access to its streaming service.) Disney+ is growing much faster than Disney ever expected, with 60 million subscribers as of August, but still sits far behind Netflix overall. Hulu, meanwhile, has 35.5 million customers, and there is a hoard of upstart services like Apple TV+, HBO Max and Peacock looking to cut into Netflix’s lead.

The one concern for Netflix is that it’s reaching a saturation point domestically, with more than 80 million customers in the U.S. and Canada. Wlodarczak estimated there are 16 million-18 million people who “pirate the service in the U.S. alone.” Adding those people as paying customers would obviously be helpful.

Netflix’s best shot at keeping its lead, however, stems from its ability to add international subscribers. DeGroote said localized content should be a “key focus” for Netflix moving forward, especially in Asia, where the pandemic hasn’t been quite as devastating. By emphasizing international growth, while also leveraging its viewer data to develop new shows and keep subscribers locked in, Netflix should continue to sit atop the streaming food chain, the analysts said.

Sean Burch