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Netflix Q1 2018 – the drivers of impressive growth

Netflix WW subscribers 2011-2018

27% subscriber growth and 40% revenue growth anchor Netflix impressive Q1 2018 results. The company’s increased original content spending and aggressive movie strategy is delivering great results.

The numbers

Netflix exceeded its own and many analyst forecasts for subscriber growth in the Q1 2018. In Q4 2017, the company said it would add 1.45 million U.S. subscribers and 4.9 million international customers. It delivered 1.96 million U.S. and 5.46 million international subscribers. The company now has 125 million global subscribers, with 56.7 million in the U.S. and 68.3 million in international markets.

Growth in the U.S. has remained strong and steady for the last year. Netflix has maintained year-over-year (YoY) quarterly growth of better than 10% since Q2 2017. Keeping in mind penetration is rapidly approaching 50% that the company increased prices 10% in Q4, such strong growth is remarkable.

Netflix international subscriber gains 2014-2018

Over the last year, the company has maintained a 40% YoY quarterly growth rate in International markets. It has added almost 20 million International subscribers since Q2 2017.

Revenue also increased sharply in Q1 2018, up 40% year-over-year to $3.7 billion. Net income also saw a big increase, 63%, to $290 million.

Engine for growth: Original content

Netflix heavy investment in content, expected to be $8 billion in 2018, is the primary engine driving growth in subscribers. Ted Sarandos, Netflix’ Chief Product Officer, says to expect more of that money to be directed toward originals:

Ted Sarandos Netflix

Ted Sarandos, Netflix

“You should expect us to be moving more and more into the licensed and original programming versus fishing in the secondary market.”

The strategy seems to be at odds with what people are watching on Netflix. According to 7Park Data, 80% of viewing in the U.S. on the SVOD giant’s service comes from licensed content. Only 18% of Netflix U.S. customers focus primarily on originals, while 42% watch mostly licensed content.

It could be that original titles like Stranger Things, and Orange is the New Black work well in attracting viewers, and TV shows keep people watching. Mr. Sarandos remains committed to original content, especially international shows. Mr. Sarandos says the company has been focused on making local content with global appeal and appears to be getting better at the approach:

“We are getting better at making a local show at least pan-regional and at best global. We’ve seen that recently with 3% and with Dark from Germany. Those U.S. numbers for us on those foreign language shows would be big hits on cable in the US.”

Engine for growth: partnerships

Creative partnerships are helping Netflix turn in strong growth in markets where it is already deeply penetrated. For example, Netflix is available on Comcast’s X1 set-top boxes. Customers can sign up through the set-top box or simply sign in with an existing subscription. Comcast and Netflix are extending this relationship. Rather than having to subscribe separately to Netflix, Comcast X1 customers will be able to subscribe to content tiers that bundle in the SVOD service.

Does this mean Netflix will be making less money from the bundled customers? Not according to Spencer Wang, Vice President of Finance/Investor Relations and Corporate Development at Netflix:

“The underlying economics are pretty consistent with our past partnerships. From an operating income perspective, it is really quite similar in terms of the impact.”

Netflix has struck a similar deal with Sky in the UK.

Continued aggressive stance towards the movie business

Netflix has been very aggressive in its stance toward the movie industry. It has released several films in a few movie theaters on the same day as releasing them through the streaming service. The company does this to qualify the movies for awards like Oscars and The Palme d’Or. Recently, the movie industry has pushed back against this practice, with Cannes banning Netflix from the competition.

Mr. Sarandos remains committed to the day-and-date strategy:

“Defining distribution by what room you see it in is not the business we want to be in. We want to be about making great films that people love.”

With the company planning to make 80 movies in 2018, don’t expect Netflix to temper its approach to placate the movie industry any time soon.

Continued growth in the video app market expected

Reed Hastings, Netflix CEO, was asked if he thought there was room for many more online video services. He seems to think there will continue to be strong expansion:

Reed Hastings“If you look at the mobile phone ecosystem, it is very rich. We see television getting close to that.”

Though he recognizes the expansion means more competition for Netflix, he says the company remains focused on being one of the services everybody feels they need. Based on the company’s performance to date, the strategy seems to be working very well for him.

nScreenMedia expects continued growth from Netflix with subscribers reaching over 140 million by years end.

Why it matters

Netflix Q1 2018 once again saw the company deliver impressive growth.

Heavy spending on content, with an emphasis on original big-name titles, is a driver of growth.

Deeper partnerships with pay TV operators is helping Netflix recruit harder to reach customers in mature markets.

The company will continue to spend heavily on originals and to take an aggressive stance with the movie industry.


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