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Written by: Sophie Lund-Yates | Hargreaves Lansdown
- In the third quarter Netflix made a net addition of 2.4m paying subscribers, compared to 1.0m expected, but 2m less than the same time last year
- Total revenue rose 5.9% to $7.9bn
- Operating margins were 19.3%, higher than the 16% expected, with operating profit benefitting from the higher revenue and timing of some spending
- The appreciation of the US dollar remains a “significant headwind” and Netflix warned of reduced demand visibility because of volatile macroeconomic conditions. Nonetheless, the group expects 4.5m new paying subscribers in the fourth quarter
- Netflix shares rose 13.1% in after-hours trading
Netflix’s surprise subscription growth has truly stolen the show. Markets were braced for a far more measly set of results, but strong content from the likes of The Jeffrey Dahmer Story and latest instalment of Stranger Things appears to have convinced people to stick with the platform, and enticed newbies into the fold. Netflix was also keen to point out one of its core strengths – its maturity. This means that it’s successfully generating profits, which its younger rivals can’t boast. That’s something that shouldn’t be overlooked, but it’s also not enough to warrant a mic drop from the original streaming provider.
Being the biggest has been enough for Netflix to get by, but that’s no longer the case. While recent growth has been impressive, it still faces a balancing act of attracting new subscribers in the face of fierce competition all while trying to maintain discipline with its spending. The introduction of an ad-tiered system in early November is an attempt to make the service more attractive to a consumer-base which is tightening its purse strings. The total number of British homes with at least one streaming subscription fell by almost 1m from January to September, in a stark reminder of the changing consumer tide.
Netflix’s challenge is that its competitive edge is becoming dulled. Rivals are closing the gap on content quality. The payment reductions offered for the ad-supported version arguably don’t represent good market value either when compared to rival offerings, especially the Disney+ and Hulu bundle. The business risks seeing its more lucrative customers, who pay for higher resolutions and offline streaming, slide down into a cheaper plan. That means Netflix risks sacrificing margin in the name of stopping subscriber outflows, rather than replenishing the top of the funnel with new ones.
All told, Netflix has shifted the spotlight to a more flattering hue, but there are some sizeable competitive challenges waiting in the wings.
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