A fatal blow or momentary blip? Whatever it is, Netflix took a big hit this week. On Thursday, the global streaming leader shocked with its worst fall in quarterly new subscriber numbers and an unexpected and significant shortfall on its own forecasts for the June quarter.

Netflix told the market that it had lost 126,000 US domestic paid subscribers, versus an expected gain of about 310,000 in the three months to June. That’s a turnaround of nearly half a million in the US. International subscriber numbers picked up 2.8 million, well below the forecast 4.7 million.

The downturn certainly wasn’t forecast in the upbeat March quarter letter to shareholders. The streaming giant was anticipating 5 million new customers, and got just 2.7 million.

The fallout

The news saw Netflix shares fall more than 10% in Wednesday after-hours trade which was sustained in trading on Thursday. That means the value of the company fell by around US$14 billion. US analysts reckoned the weak quarter was a one-off blip and that Netflix would bounce back this quarter.

The result is the first from the so-called FAANG group of megatechs (Facebook, Apple, Amazon, Netflix and Alphabet (Google), which these days sets the tone for the rest of the US market and have a big influence globally. Netflix’s report saw share futures for markets across the world turn red early Thursday morning.

It is likely to also have an impact locally on the value of Nine Entertainment which owns Stan, the second biggest video streamer in Australia. Nine has been trying to sell a stake in Stan by the end of the year, preferably to Disney (which starts its own global streaming business shortly). Disney is Stan’s most important content supplier and selling a shareholding to the US giant could keep it out of the Australian market.

The Netflix news comes at the worst possible time for Nine as it prepares to report its first results including Fairfax Media. That report will be released next month and market analysts had been looking for news of Stan’s performance and an update on the plans to sell a shareholding to Disney. Now Netflix has shown that there is a limit to the business in the US, which remains the sector’s most important market.

On top of that there’s the Foxtel Now and Kayo (sports) streaming services of Foxtel, 65% owned by News Corp. Both claim big growth in the past year but News and Foxtel management will start worrying about the message from Netflix’s shock report, especially if Disney starts its service in this country.

Why did this happen?

In the now usual letter to shareholders, Netflix executives noted that price increases began rolling out earlier this year, and disappointing subscriber additions were in regions that were experiencing the larger bills. The company also pointed to a lack of fresh content in the quarter, despite the company spending over US$3 billion a quarter on content:

We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region). Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated.

Back in the first quarter letter, those same people were not really concerned about price rises. In fact, Netflix was relaxed…

We’re working our way through a series of price increases in the US, Brazil, Mexico and parts of Europe. The response in the US so far is as we expected and is tracking similarly to what we saw in Canada following our Q4’18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change.

On content they didn’t note the lack of second quarter offerings, but did say — as they did in the latest letter — that there is a lot of new content coming in the third and fourth quarters. Netflix reckons that will do the trick and is forecasting it will pick up 7 million new subscribers in the three months to September. That doubling down by Netflix management is now the biggest risk for the company, its future share price, and the streaming sector globally.

Peter Fray

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Peter Fray
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