Headlines, hikes and honors – a wild week in the world of Netflix

Netflix came out with its fourth quarter and full year 2018 results last week just hours after Faultline Online Reporter went to press. Missing the boat isn’t always a negative though, gifting us extra time to dwell on the latest figures while others rushed to condemn the lower than expected domestic subscriber uptake, in the wake of the ill-received news of this quarter’s US price hikes.

But first of all, achieving subscriber growth of 8.8 million was still a record quarter for the company, not that the majority of headlines would want anyone to know that, as Netflix fell short of its own projection of 9.4 million subscriber adds.

Now the dust has settled, a number of conflicting reports and surveys have surfaced, aiming to paint a picture of how the domestic subscriber base will respond. One, from StreamingObserver, laughably claims over a quarter (27%) of subscribers might scrap their subscriptions and instead seek out a cheaper alternative, while 3% of respondents said they will definitely cancel, leaving an overwhelming 70% who will happily pay, which essentially reads as 97% from where we’re standing, due to the sheer unreliability of a leading question which includes the ambiguous term “might cancel”.

A more realistic outlook was provided by TDG, with its Quantum Viewing Behavior survey of 1,940 US broadband users resulting in a majority 84% of respondents saying they were happy to pay the extra dollar for Netflix’s standard plan, which has been raised from $8 a month to $9 a month, while 8% said they would cancel. However, if Netflix were to increase its monthly fee by $3, 16% said they would definitely cancel and 22% would downgrade, while a $5 price hike would see 22% cancel their subscriptions, according to the survey.

Luckily, the maximum hike last week was $2 a month, with the HD plan rising from $11 a month to $13 a month, and the 4K premium package from $14 a month to $16 a month. It’s unclear though if the survey’s take on price hikes factors the increase of multiple price hikes over a period of time, or if it means taking $3 or $5 hikes in one hit.

CEO Reed Hastings diverted a question about the price hikes to Chief Product Officer Greg Peters during the company’s earnings call last week. Peters stated, “I think the model we’ve got is a fairly simplistic one, where we think our job is to effectively invest the money that our subscribers give us every month, so that we can give them incredible content in a better and better product experience. And if we do that well, we create more value for our subscribers and then occasionally, we’ll come to them and we’ll ask for a little bit more money, so that we can actually start that next cycle of investment.”

Despite missing its forecast by 300,000 net subscriber adds, what stands out beyond doubt once again is international growth. Netflix added a whopping 7.3 million subscribers overseas in Q4, compared to 5.1 million in the previous quarter, bringing its total to almost 80.8 million. Back on home turf, there were just over 1.5 million subscriber additions to total 58.5 million.

CCO Ted Sarandos highlighted Spanish language production Elite as one of its international success stories during the quarter, not just in Spanish speaking countries but apparently the world over, which is really testament to the investments in foreign language content. “It’s our ability to create hits and create movie stars and TV stars from anywhere in the world for the rest of world is something that we’ve really been working hard at it and have been incredibly enthused by the results in Q4 and how it’s looking in Q1,” said Sarandos.

Meanwhile, Hastings touched briefly on an important trend in the company’s earnings call, “There used to be a tradition in television, where the network would make one show and then they try to sell market after market after market, that’s less and less the case while we’re working with producers and networks now to pre-buy or co-produce for the rest of the world. A similar evolution to the old studio film business, where the studios used to carry the international rights until they sold them and then they more infrequently now go out and do international co-productions.”

We have knocked up a very simple table below just to visualize the knock on effects of the October 2017 price hike of $2 across the board, compared alongside Netflix’s own projected numbers for the next quarter. If anyone notices anything out of the ordinary in the table, please do get in touch, but as far as we can see the figures look stellar.

Netflix is now in a position to carry out these incremental price hikes every 18 to 24 months, just as internet service providers in the US are gradually raising their tariffs to offset pay TV losses. There are even some fearmongering headlines creeping out suggesting that, with the increasing prices of OTT video services and the rising prices of broadband services, an average monthly bill for video streaming and broadband subscriptions will soon be on par with the price of a full cable TV subscription. That far-fetched prognosis is quite simply several jumps too far.

That said, Netflix has approached its Q1 forecast rather cautiously, projecting 8.9 million subscriber gains, only 0.1 million more than in Q4, although Netflix doesn’t break out its subscriber forecast across domestic and international markets.

If we must highlight a negative, there might be some concerns regarding the deceleration of contribution profit in international markets, sliding from a record $218 million in Q3 (an 11% margin), to $81.7 million last quarter (a 3.9% margin), a slight dampener on the significant progress made overseas during 2018.

Content spend again peaked in Q4, racking up nearly $3.8 million in additions to streaming content assets, a $550 million quarterly increase to make it just over $13 billion for the year.

Of course, any negatives from the highs and lows of Netflix’s tumultuous week were soon forgotten once the streaming giant received 15 Oscar nominations. Faultline Online Reporter doesn’t dwell on awards as readers will know, but surely in anyone’s book such an achievement represents value for money.