Netflix missed its estimated subscriber gain for Q2 by 1 million, but still managed to gain 5 million. With regional competition increasing, the company is boosting local content production to maintain International growth. In the US, the focus is on retaining the 57 million subscribers it has.
Bad quarter still sees 5 million new customers
As quarters go, Q2 2018 was a bad one for Netflix. The company still added 5.1 million subscribers in the quarter, with 670,000 coming from the US and 4.5 million new international customers. However, the company had its biggest shortfall ever coming in 1 million subscribers below its estimates for the quarter. Understandably, Wall Street was not impressed, and the company’s stock tumbled 14% in after-hours trading.
In the earnings call, executives could not explain the miss. Instead, they focused on the positives. Earnings, margins, and revenue were all in line with previous forecasts. For example, revenue increased 40% over Q2 2017, to $3.9 billion.
The weak Q1 results made Netflix more cautious about Q3. The company is forecasting to almost duplicate second quarter numbers. Netflix forecast an overall increase of 5 million subscribers. International markets will contribute 4.4 million and the US 450,000.
Regional competition increasing
In the earnings call, Reed Hastings was asked about increased competition. He pointed to the usual suspects, including Disney which is scheduled to launch its entertainment service in 2019. However, Mr. Hastings also called out French Broadcasters as potential competitors. Three broadcaster groups – France Televisions, TF1, and M6 – announced they had joined forces to launch a French SVOD service dubbed Salto in 2019.
The weekly news magazine L’Express lauded the announcement:
“The time has finally come to rebel against the Americans, Netflix and also Google, Amazon, and Apple.”
The magazine expressed a feeling that is shared by many European countries. Netflix is liable to face similar efforts in the UK, Germany, and Scandinavia. Whether these regional It remains to be seen how successful they will be in turning the tide and reclaiming viewers.
Netflix no “out-of-towner”
Netflix has been migrating content creation outside the US for some time. There are many solid strategic reasons for doing this. However, given the increasing regional competition, Ted Sarandos chose to focus on the regional benefits Netflix brings:
“Netflix is not just an out-of-towner but someone that is producing content you care about in every part of the world.”
By way of example, he talked about the successful content Netflix has created in India, including Love Stories, Ghoul, and Sacred Games. Netflix needs all the help it can get in India. The service is too expensive for mass adoption and runs a very poor fourth place behind HotStar, Voot, and Amazon Prime Video.
Marketing focused on customer retention
Last week, Ampere Analysis suggested Netflix subscriber acquisition cost (SAC) was over $100. The company attributed much of the $228 million Netflix spent in Q1 on US marketing to acquiring 2 million new subscribers in that quarter. However, David Wells, the company’s CFO, says very little of Netflix marketing spending goes toward subscriber acquisition.
“Only a fraction of our spend is oriented around direct acquisition. The majority of the marketing spend, call it 80-85%, is oriented around building title brands.”
Based on those numbers, Netflix might say SAC for Q2 is $50, not over $100. Of course, building title brands also have an impact on attracting new customers. However, it has a more important impact. It keeps existing subscribers happy, and happy customers keeping paying the monthly subscription.
Why it matters
Netflix’ slower than expected growth in Q2 2018 has Wall Street rattled.
However, the company is sticking to its strategic priorities.
Move more content production to regional markets.
Spend much more on promoting show brands rather than directly to attract new subscribers.