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Netflix


Netflix Subscribers by Service

Streamers109 million(+26% versus 16Q3)
U.S.52.8 million(+11% versus 16Q3)
International56.5 million(+44% versus 16Q3)
U.S. DVD3.6 million(-17% versus 16Q3)
Tables and graphs updated 10/16/17

Commentary – on Q3 2017 results

Netflix Q3 2017 strong, tries to woo Hollywood back

Netflix delivered good results in Q3 2017, boosting subscribers 26% over Q3 2016. However, it spent a good proportion of its earnings call trying to convince investors it could manage as major studios withdraw their content.

Good Q3 results

Netflix exceeded its estimates for growth in Q3 2017. In Q2 2017 guidance, the company estimated it would gain 4.4 million subscribers in Q3, with 0.75 million coming from the U.S. and 3.65 from international markets. Actual Q3 results show that the company grew subscribers 5.3 million, with 0.85 million from the U.S. and 4.45 million international.

The company offered no specific explanation for the better than expected results, particularly in international markets. However, Ted Sarandos talked in general about how the company continues to ramp up production of content in foreign markets. By way of example, he mentioned Suburra, the just-released Italian-produced Mafia drama. Likening the show to Narcos, Mr. Sarandos said Suburra is another example of Netflix’ approach to international productions: produce shows locally that will have a strong appeal throughout the world.

Dealing with the changing content licensing landscape

Much of the investor conference call focused on the movements in the content market. Content providers like Disney and Fox are moving away from partnering with Netflix. Investors are understandably nervous that this could adversely affect company growth.

With $7-$8 billion earmarked for content in 2018, Reed Hastings, Netflix CEO, and Ted Sarandos, Head of Content, both said more of that money would go to original content production to compensate for studios holding back their better content. For example, the company delivered eight original movies in Q3 but plans to produce 80 movies in 2018.

Netflix international subscriber gains 2013-2017

However, the executive team seemed to be playing defense with investors. They downplayed the importance of Disney and re-emphasized the value of Netflix to television providers.

Downplaying the value of the Disney deal

There has been much debate about the value of the Disney to Netflix. Reed Hastings was quick to downplay the impact of losing that content in 2019. He said that:

“Disney is a great brand with great content, but internationally we have it only in The Netherlands, Australia, and Canada. And you saw how big our international growth was in most of the world without the Disney content.”

Spencer Wang, Netflix VP of Finance and Investor Relations, talked about the acquisition of MillarWorld. The company’s purchase brings an established set of superheroes exclusively to Netflix. Mr. Wang said:

“It is the first acquisition in our 20-year history. From that, you can take that we have a very strong bias to build over buy.”

It also shows that Netflix is acutely aware that the loss of Marvel content leaves a substantial hole in the Netflix catalog. The company executives hope that MillarWorld will plug that hole.

The Netflix “bump” for television

Despite the emphasis on original content, the Netflix executive team would like to maintain the option of licensing television content. Mr. Sarandos reemphasized the company’s value to television by proudly claiming a substantial amount of the credit for the strong season 2 opening for the CW’s show Riverdale:

“Having Riverdale on Netflix in the second window meant an enormous growth in audience for it in season 2. In fact, there was 400% audience growth for CW from season 1 to season 2. The only thing different from This is Us is that Riverdale is on Netflix.”

Riverdale’s season 2 opener drew an audience 2.3 million and enjoyed a 467% increase in the teen audience versus the shows season 1 opening episode. Overall, the season 2 premiere’s audience was up double digits from the average audience size for season 1 and triple digits from the season 1 finale.

Season 1 of This is Us was available exclusively on Hulu over the summer. The Season 2 opener drew an audience of 12.6 million, second only to the season 1 finale (12.8 million.) In the key demographic for the show, 18-49, ratings improved 36% from the series premiere and 12% from the finale.

Mr. Sarandos’ point is to emphasize to TV content providers that working with Netflix can help substantially boost a show’s audience. He says TV providers should balance this value against working with other providers. It does seem that Netflix’ enormous reach provided a substantial benefit to a small show with a young audience like Riverdale. It is less clear if the company can deliver the same value to a successful show with an older audience like This is Us.

What to expect in Q4

Netflix executives did not think the price increase would impact growth in the fourth to an excessive degree. The company forecasts a gain of 6.3 million subscribers, 1.25 million in the U.S. and 5.05 million internationally. In Q4 2016 the company gained 7 million subscribers, 1.9 million in the U.S. and 5.1 internationally. nScreenMedia expects Netflix to finish out the year with 116 million subscribers, 53 million in the U.S. and 62 million internationally.

Why it matters

Netflix turned in good growth results in Q3, increasing subscribers over 5 million, or 26% year-over-year.

Company executives acknowledged that television producers are choosing to license less content to Netflix.

To compensate, Netflix is channeling more money to the creation of original content, including 80 films in 2018.

Netflix Subscriber Revenue

17Q3 Total$2.99 billion(+30% over 16Q3)
2016 Total$8.8 billion(+29% over 2015)
2015 Total$6.8 billion(+23% over 2014)
U.S. Streaming$5 billion2016
                              Source: DTV Research, 2017

* Indicates Estimate

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