Disney who? Netflix Q3 earnings were up >31% Y/Y, its operating income doubled from a year ago and it added 6.8 million new subscribers in the quarter, delighting Wall Street and driving its share price up more than 9% in after-hours trading.
It was the first quarter of 30%-plus revenue growth in a year, providing the company the shot in the arm it needed after a lackluster Q2 and on the cusp of what is being seen as an escalation of the streaming wars as Apple+ and Disney+ streaming services get ready to launch.
The subscriber adds were the best Q3 the company has ever had, topping last year’s record 6.1 million adds. Netflix is forecasting 7.6 million additions in Q4. Netflix now has more than 158.3 million paid subscribers globally.
US paid net adds totaled 500,000, missing the 800,000 the company had expected. Year-to-date paid adds are 2.1 million, compared to 4.1 million for the first nine months of 2018.
Netflix said its price hike in the US has slowed US subscriber growth, but pointed out that US ARPU is up 16.5% Y/Y.
Netflix Q3 earnings a sign of market change
The results “clearly show a company that is now moving into a different operating phase,” said Paolo Pescatore, PP Foresight’s tech, media & telco analyst. “Netflix was the main player in town and around the world. Soon enough, it will be competing with big heavyweights in their own domains… While they are not direct competitors (with Disney and Apple), all will be fighting for viewers attention and their money.”
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To continue to dominate in the space, Netflix will need to continue to increase its revenue. And, it’ll have three avenues to do that:
- Increase subscribers at a faster rate;
- Increase prices; or
- Diversify into new areas.
Netflix said it will continue to focus on original content both because of the “anticipated pullback of second run content from some studios” and because its originals are driving member viewing and engagement.
It said Stranger Things Season 3 was the most watched season to
date with 64 million member households in its first four weeks.
Non-English original push to grow
Netflix plans to expand its non-English language original offerings to help grow its penetration in international markets. In Q3, Season 3 of La Casa de Papel (aka Money Heist) became the most watched show on Netflix across non-English language territories with 44 million households watching the new season in the first four weeks of release.
Netflix has released 100 seasons of local language, original scripted series from 17 countries and have plans for over 130 more.
Netflix said it expects to build its film effort in Q4, with releases including Martin Scorsese’s The Irishman (with Robert De Niro, Al Pacino, and Joe Pesci), Marriage Story (starring Scarlett Johansson and Adam Driver) and The Two Popes (featuring Anthony Hopkins and Jonathan Pryce).
Kudos to its low-price mobile plan in India
In July, Netflix trialled a lower-priced mobile plan in India, something it says has performed better than expected in a market that could prove to be a critical one in the competition-rich region.
“Uptake and retention on our mobile plan in India has been better than our
initial testing suggested,” Netflix said in its letter to shareholders, which will allow it to invest more in Indian content. “While still only a very small percentage of our total subscriber base, we’re continuing to test mobile-only plans in other markets.”
Netflix also has expanded its partner-based bundle offerings, adding bundles with Sky Italia, Canal+ in France, KDDI in Japan and Izzi in Mexico this quarter. It also has localized its service in Vietnamese, Hungarian and Czech, vowing to continue to expand language coverage and accessibility.
Competition is the new name of the game
Netflix has acknowledged the potential for headwinds from the bevy of new services set to launch in the next several quarters in the US and globally.
“The launch of these new services will be noisy, it said in the letter. “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long-term, though, we expect we’ll continue to grow nicely given the strength of our service and the large market opportunity.”
The bottom line
So much has been made of the pending launches from Apple, Disney, NBCUniversal, and others, with some pundits warning Netflix’s sky soon would be falling.
What they don’t realize is that — as Netflix mentions in its letters to shareholders — what the flood of new services is more likely to do is accelerate the demise of liner TV as more consumers embrace on-demand viewing. Just as cable nets fragmented the broadcast audience from the Big 3 — and eventually, the Big 4 — TV networks, so, too, will new streaming services continue to erode traditional linear TV audiences.
“We’ve been preparing for this new wave of competition for a long time,” Netflix said to its investors. “It’s why we started investing in originals in 2012 and expanded aggressively ever since — across programming categories and countries with an ambition to share stories from the
world to the world.”