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Netflix Second Quarter Results Should not be Evaluated in Isolation

Netflix announced a lower than expected 1.7 million global net additions in Q2 2016, below expectations of many onlookers, as well as its own. It largely blames the recent announcement of price rises and subsequent increase in churn. However, these results are not entirely surprising. There are a number of factors to consider when monitoring Netflix's performance, with the future outlook for both domestic and global growth still providing encouragement for investors:

1) Netflix added just under 300,000 paid streaming members this quarter in the USA, but domestic subscriber growth has exceeded expectations for some time, particularly when you consider that Netflix penetration of broadband households has now passed 50% (this excludes those who are using someone else's subscription).

2) As it is for any subscription service, churn management is clearly key for Netflix now. The no-contract approach makes the service more accessible to a wider base, but it makes it easier to "dip-in and out". Futuresource Consulting's just published Living with Digital consumer survey suggests that over one-third of current and previous US Netflix subscribers have cancelled then re-started their subscription in the last year, a figure that is also similar in many European countries covered by the research. Key to managing this will be ongoing refreshment of content, particularly for both its originals and exclusives.

3) As subscriber growth inevitably slows, the focus will steadily shift to growing ARPU. The price increases and grandfathering process are a key part of growing this ARPU and indeed, Futuresource's Living with Digital survey indicates that over 90% of Netflix subscribers in the USA and key European markets feel that Netflix is value for money. Even further price rises would not put off most subscribers to Netflix, the vast majority of Netflix US users would happily absorb a $2 price rise.

4) ARPU growth is also being achieved by steadily shifting consumers to the premium, family plan. Around 20% of US and UK subscribers claim to be this top tier, as highlighted in the Living with Digital survey. Further growth is expected in this category, with increased emphasis expected to be placed on growing this tier, particularly as more 4K UHD content is introduced. 

5) Despite Netflix now being available in almost every country, international net additions were below expectations at 1.5 million in Q2 (paid member additions were 1.9 million). However, in many "rest of world" markets, the launch of "skinny Netflix" required comparatively low capital investment and is more of a stake in the ground for longer term growth opportunities. In the larger non-English speaking markets such as France, the availability of local language content is critical in attracting new subscribers but perhaps more importantly, retaining existing subscribers. 

Amazon Prime Video will provide the greatest competition in many markets (where available), at least in the short term, as it grows its user base impressively and is set to launch in new markets such as France, Italy, Spain and potentially others. However, Futuresource research indicates a significant overlap between Netflix and Amazon Prime Video users, across the key markets of the USA, UK and Germany; indeed, over half of Netflix subscribers also use APV. 
Moving forwards, monitoring measurements beyond that of just subscriber growth will become of increased relevance, as Netflix continues to focus on improving its content offering whilst managing the fine balancing act of growing ARPU against subscriber retention.

About the author

David Sidebottom

About Us

Here at Futuresource Consulting we deliver specialist research and consulting services, providing market forecasts and intelligence reports. Since the 1980s we have supported a range of industry sectors, which has grown to include: CE, Broadcast, Entertainment Content, EdTech and many more.