Investors should look beyond Netflix's US subscriber slump

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This was published 4 years ago

Investors should look beyond Netflix's US subscriber slump

By Jennifer Duke

Investors in Netflix were startled by the admission it had lost subscribers in the United States for the first time since 2011 and missed its global forecasts by a wide margin.  But those who are still questioning the streaming giant's strength, particularly as behemoth competitors prepare to launch rival services, should look further than its home market.

Netflix shares were hit hard as investors came to grips with the result - falling by as much as 12 per cent in after hours trading on Thursday morning, AEST.  Yet the result had implications well beyond the stockmarket.

Netflix had lower growth than expected over the quarter.

Netflix had lower growth than expected over the quarter.Credit: Bloomberg

Executives from Disney, which will launch Netflix rival Disney+ later this year, and local video streaming service Stan (owned by Nine, also the owner of this newspaper) would certainly have been paying attention.

And the reaction from within the industry was far less alarmist than the knee-jerk market response.

Media sources believe the subscriber slump is understandable because having new shows people want to watch is still the make or break for TV businesses and Netflix just didn't have that many hits last quarter. A price hike in key markets including the US was also a factor in the subscriber growth miss, even if it actually boosted Netflix's bottom line.

Growth in [India] is a marathon. So we're in it for the long haul and we're seeing nice steady progress

Netflix's Ted Sarnados

A "less impactful content slate drove second quarter subscribers below expectations", Pivotal Research Group principal Jeffrey Wlodarczak said in a note.

Despite this, Mr Wlodarczak added the second half is likely to be a strong one with the forecast for the overall 2019 growth in subscribers left unchanged despite the quarterly miss.

This expectation is uncontroversial as new seasons of major shows like hit series Stranger Things returning to Netflix will help the company's performance.

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And Netflix has only just started to raise the curtain on its global opportunities in locations growing rapidly in population and wealth.

The most obvious market is India, where a mobile-only, lower-priced Netflix plan will shortly be launched for the country's 1.3 billion people.

"Growth in that country is a marathon. So we're in it for the long haul and we're seeing nice steady progress," Netflix chief content officer Ted Sarandos said on the earnings call on Thursday morning (AEST).

There will be five new original shows for India in coming months and non-English language shows are already attracting millions of viewers on the service.

Netflix is also finding other countries promising, with Spanish language "enormously popular shows" Elite and Chicas del Cable returning for new seasons and shows from Germany, Denmark and Sweden - How to Sell Drugs Online, The Rain and Quicksand - reaching up to 15 million global watchers.

There are also signs that Netflix sees the importance of going local in Australia, having launched its first Australian show Tidelands in 2018 and recently opening a Sydney office.

So, the soft quarterly result in the US might not be Netflix's "canary in the coal mine" moment, but more evidence international markets are where the company's future lies.

As RBC Capital Markets technology analyst Mark Mahaney said in a research note: "this isn't Netflix's first miss". Four out of the last 14 results have been lower than forecast.

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"This is a contrarian view, but we believe International could actually be as or more profitable than the US, because those markets are generally less competitive and local production costs can be dramatically lower," Mr Mahaney said.

Rival Stan has also discovered the strength of putting Australian accents on screen, with January-released original Bloom helping drive record subscription growth alongside a short-term content deal with Disney that included family-friendly titles like The Lion King.

The reaction to the series helped Stan's management have the confidence to pour $20 million into its next big Australian production The Commons, in partnership with Screen Australia.

This global hunger for local content has big implications for Disney+ as it rolls out and decides whether to partner with companies offshore.

Disney's executives know the strength of global markets - two thirds of Disney+ subscribers are forecast to come from outside the US by the end of 2024. But Disney's library, as one media source points out, is "largely US content".

Which may prompt it to seek out local partners in markets outside of the US where it launches. And there has already been plenty of speculation about that in Australia, with both Stan and Foxtel mooted as dance partners.

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