Netflix Q3 2019 results reversed Q2’s poor performance. Things could get bumpy again in Q4. Netflix has slashed in Q4 sub growth forecast for the U.S., while it continues to release shows at a furious pace. Will it be enough to ride out the market turmoil caused by Disney+ release in November?
Netflix returns to strong growth in Q3
The murmurs that the boom phase of Netflix’s growth, ignited by the loss of U.S. subscribers in Q2, have been silenced, at least for now. The streaming giant returned to modest subscriber growth in the U.S. and robust expansion in the rest of the world. Netflix added 520,000 paying U.S. customers in Q3 2019, up from a loss of 130,000 last quarter. Internationally, the company gained 6.3 million new paying customers, more than doubling its Q2 gains.
However, the growth trajectory of the company, both at home and abroad, seems to be slowing. In the U.S., Q3 2018 saw year-over-year (YoY) growth of 11%. This year, it has slowed to 6%. Similarly, in international markets, Netflix subscriber growth in Q3 2018 was 43%, and in the quarter just ended growth slowed to 33%.
Revenue growth, on the other hand, shows no signs of slowing down. The company generated $5.1 billion in revenue in Q3, up 29% from the same quarter last year. Two things drove the significant increase: subscriber gains of 28 million between Q3 2018 and Q3 2019, and price increases of $1 to $2 per month (depending on subscriber plan) in May.
Pedal-to-the-metal with content investment
Netflix has no plans to slow its investment in content anytime soon. According to Netflix CFO Spencer Neumann, this year the company will continue to run a sizeable free cash flow deficit:
“This year, we are expecting roughly negative free cash flow of three-and-half billion…that is investment in future content.”
Ted Sarandos, Netflix’s head of content, is taking that money and making shows and movies at a furious pace:
“We have about 35 shows around the world that we release week-over-week.”
The cost of creating original is another reason the company can’t slow its content spending. According to Mr. Sarandos, a quality show like Stranger Things 3 is 30% more expensive to produce this year than it was in 2018. He went on:
“The rumored $100 million budget for House of Cards seven years ago today represents about 1% of our content budget.”
Reed Hastings, Netflix CEO, quipped, “And today that would be a bargain!”
International markets receiving increased content investment
With 62% of Netflix subscribers residing outside of the U.S., it is natural for the focus of the company to shift there. Moreover, with 90% of the subscriber growth coming from international markets, Ted Sarandos is planning to ramp up foreign production:
“We’ve released original local language content in 17 countries to date. We’re going to increase that to 30.”
There are other reasons Netflix is increasing international products. Some regions are forcing the issue. Europe, for example, is finalizing rules that will mandate that global services like Netflix have 30% of their titles come from home markets. Other regions are equally as concerned about the future of their home content producers, and Netflix should expect more regional laws like the European 30% rule.
Whole season show drops not going away
Disney has been clear that it will follow the traditional television one-show-per-week model when releasing originals on the new Disney+ service. Netflix is experimenting with different release models for its content too. For example, the latest season of the Great British Baking Show is being released one episode per week. However, most programs will see all episodes released at once on the service. The reason, Mr. Sarandos claims, is simple:
“In markets where we release all at once versus one per week, we get more viewing and cumulatively more social buzz…for the all-at-once model.”
Netflix lowest forecast on competition fears
Faced with new competition from Disney and Apple in Q4 and NBCU and WarnerMedia in the New Year, Mr. Hastings was as sanguine as ever. He said the company has successfully competed with Hulu, Amazon, and HBO for a long time and expected to do the same with new entrants. He sees the goal of the service remains the same as ever, to “make us a must-have.”
Despite the bold words, the company is expecting to feel some effect on growth in Q4. It has forecast U.S. paid subscriber gains of 600,000, under half of the total achieved in the same quarter for the previous two years.