Q2 2015 was yet another strong quarter for Netflix. The company outperformed market expectations picking up 3.3 million new subscribers to reach 65.6 million in total, 5.3% quarter-over-quarter growth. How will the company keep the growth coming? Expansion and content investment are the keys.
Netflix continues to grow strongly both at home and abroad. US subscribers increased 0.9 million, a 2% quarter-over-quarter (QoQ) increase and 17% year-over-year (YoY) gain. Internationally the company did even better. Subscribers increased 2.4 million to 23.25 million, an 11.4% QoQ gain and 69% YoY increase. This is particularly impressive because the company did not launch in any new markets in Q2. Marketing programs and word-of-mouth on the content seems to doing a good job in driving growth.
The company is very bullish in its ability to continue to grow at this pace. Reed Hastings said he feels the company should be able to continue to grow 5-6 million subscribers a year for at least the next couple of years. There are two primary reasons he thinks this is possible: continued global expansion and growing original content.
The company has set itself the bold goal of launching in all countries around the world by the end of next year. It plans to launch in just 4 more countries this year. Netflix will appear in Japan later in the third quarter and in Spain, Italy, and Portugal in the fourth quarter.
Japan could be a challenge, keeping in mind that Hulu failed to find success there until it was purchased by Nippon TV recently. Reed Hastings, Netflix CEO, was understandably cautious about the market, saying he thought it would be one of the slowest markets they have launched in. However, he is optimistic, as the company is already seeing great support from CE vendors there:
Sony, Panasonic and Toshiba all are integrating Netflix into their TVs. They have a red Netflix button <on the remote> even though we haven’t launched.”
Integrating with CE manufacturers has been a key strategic component of any country Netflix has launched in and should continue to pay dividends as it continues to expand.
To launch in every country by 2016 will still be a stretch for the company. nScreenMedia believes the company will launch specific apps and service in larger markets, like China, but will have a global service available everywhere else.
Netflix also says the current content mix is working well in all the markets it is participating in. It is particularly pleased with the performance of originals. Ted Sarandos, Chief Content Officer, anticipates continuing to increase the company’s investment in originals, using a substantial amount of the $5B he anticipates spending on content in 2016 for new movies and shows. He said: “The total content spend doesn’t change. The slices of the pie do.”
One area the company thought wouldn’t contribute to growth, but would boost usage was innovation in recommendations and in the app interface. Mr. Hastings said the company has seen tremendous benefits as the company mines the huge amount of user data at its disposal to improve recommendations. He also said he anticipated a lot of innovation in the hardware in the coming months and years which he plans to take advantage of in the app interface.
One key advantage Reed Hastings kept coming back to was that the company is a “learning machine.” In all aspects of its business the company listens to the performance data and works to improve on all fronts. He cited as an example of this the company’s performance in Brazil, which he said was “weak in the first year and now is a rocket-ship.”
Based on the performance so far in 2015, nScreenMedia anticipates Netflix will likely finish the year with 74M subscribers: 45 million in the US and 29 million international. Revenues should also increase to around $6.8B, representing 23% growth over 2014. By way of comparison, Comcast revenues were $68.8B in 2014.
Why it matters
Netflix growth continues to be strong, even in the relatively mature US market.
Growth in existing markets is driven by the company’s nearly $5B investment in content, and particularly in Netflix original content.
Overall growth is being driven by the rapid expansion in international markets, which should reach its culmination by the end of 2016.