nScreenMedia OTT multiscreen media analysis


Netflix Subscribers by Service

Streamers117.6 million(+25% versus 16Q4)
U.S.54.8 million(+11% versus 16Q4)
International62.8 million(+42% versus 16Q4)
U.S. DVD3.4 million(-17% versus 16Q4)
Tables and graphs updated 1/22/18

Commentary – on Q4 2017 results

Netflix finishes 2017 strongly, unworried by Disney

Netflix shrugged off any negative impact last year’s subscription price increase might have had. The company beat its forecast for subscriber acquisitions in the fourth quarter handily, propelling the stock to new highs in after-hours trading.

The Q4 2017 and full-year growth numbers

Overall, the company gained 8.3 million subscribers in Q4, to reach 117.6 million subscribers. For the year, the company gained nearly 24 million subscribers. Despite the already deep penetration in the U.S. market, Netflix added 2 million subscribers for the quarter and 5.3 million for the year. This performance is impressive given that the company beat last year U.S. subscriber increase, growing 10.8%.

International growth continues to drive the company’s expansion. The company added 6.4 million International customers for the quarter and 18.5 million for the year. Though International performance is impressive, it continues a slowing trend. In 2017, the company grew subscribers 42% versus 48% in 2016 and 64% in 2015.

Netflix US subscriber growth 2013-2017

Revenue increased 32% in 2017, with the company taking in $11.7 billion. The company says it is profitable in both the U.S. and, for the first time, in International markets.

Netflix stock gained $19 (up 8%) in after-hours trading.[1] If these growth trends hold throughout 2018, nScreenMedia forecasts Netflix will finish the year with 145 million subscribers, 41% in the U.S. and 59% Internationally.

Are MVPDs driving Netflix growth?

In late 2016 Netflix embarked on a new approach to the U.S. market. The company reached an agreement with Comcast to appear on the X1 set-top box. With growth slowing in the U.S., this seemed like a good way to go after people slow to adopt new online services. However, David Wells, Netflix CFO, downplayed the role of MVPD relationships in the continued strong U.S.  market growth:

“Netflix continues to be a multi-impression sale. If somebody joins us through a partner, it isn’t necessarily because that partner did a specific promotion. It might be the most convenient collection mechanism for that. …It (MVPDs) continues to be a meaningful contributor, but not a dominant contributor regarding being a major channel for us in terms of acquisition.”

Mr. Wells added that the relationships are important and that the company intends to expand them. For example, he said Netflix might be available as part of pay TV content bundles, as well as an individual subscription. However, he emphasized that MVPDs are only a small part of a much broader customer acquisition strategy.

No competitive pressure from Disney

There has been a lot of speculation that Disney intends to compete head-to-head with Netflix. Disney announced a direct-to-consumer (DTC) service which will launch in 2019 at a price below Netflix subscription rate. The company also announced it would not renew a movie distribution with Netflix, instead preferring to reserve top movies for its service. As well, Disney’s pursuit of Fox television assets has further fueled the Netflix versus Disney rhetoric.

Commenting on the Disney-Fox deal, Netflix CEO Reed Hastings said, “These kind of big U.S. media company mergers are pretty peripheral to us.” Ted Sarandos, Netflix’ content head, said that though Disney movies would be leaving Netflix in 2019 the Marvel series such as Luke Cage would remain.

Mr. Hastings went on to say that he didn’t think a Disney DTC service would be a direct competitive threat to Netflix:

“They are putting together a Disney consumers service which we think will be very successful because Disney has super-strong brands. We don’t see it as a threat to us any more than Hulu has been.”

Mr. Hastings may well be right that Disney does not represent a direct threat in the short-term. However, the two companies will compete for consumer entertainment spending and attention. Moreover, with the addition of Fox content, the Disney service could provide the same type of content as Netflix. Given people only have so much time and money to devote to video entertainment, it is not hard to see how a subscription to a Disney service could displace a Netflix subscription in a substantial number of homes. However, it could take several years before Disney becomes a significant problem for Netflix.

Why it matters

Netflix closed out 2017 with strong growth in both the domestic and international markets.

The company will continue to expand relationships with MVPDs, though executives were quick to minimize the importance of them to the overall health of the company.

Netflix CEO Reed Hastings did not think a Disney DTC service will be a direct competitor. However, in the long-term, it may prove to be a much more serious rival.

[1] At 4:30 PM Pacific time January 22, 2018

Netflix Subscriber Revenue

17Q4 Total$3.28 billion(+33% over 16Q4)
2017 Total$11.7 billion(+33% over 2016)
2016 Total$8.8 billion(+29% over 2015)
U.S. Streaming$6.2 billion2017
                              Source: DTV Research, 2017

* Indicates Estimate

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