Netflix price hike to make or break original content strategy?

There are distinct similarities between Netflix’s most recent results and the set it put out last quarter – smashing all estimates and pledging more cash to original content. Yet this time, we think the streaming giant might have got ahead of itself before its original content strategy has begun reassuring investors. The recent price hikes in North America and Europe are a precursor to a global swelling of prices to come – it is the only way Netflix can justify its $8 billion programming spend for 2018.

An interesting figure shows that for Netflix’s 109 million global subscribers, its programming costs work out at $21.50 a head, according to Bloomberg Gadfly. Is this sustainable, and is it possible for Netflix’s original content to be popular enough to drive its ARPU up to above the $20 mark? Before the latest price hikes, its domestic ARPU was around $9, while overseas this was $8.

Netflix will lose a handful of subscribers to the fee increases but ultimately most will happily cough up a little extra. In markets such as India, Netflix has a different dilemma on its hands, where its current subscription fee is much higher than the average for a streaming service and targeted at middle and upper class families. Therefore, if Netflix wants to break Asia and appeal to the masses, it must go the opposite route to North America and Europe by lowering its prices – something we don’t think Netflix will agree to.

Content spend took center stage for the latest Netflix results again, as it announced plans to release 80 original movies in the next year – more than Sony, Fox, MGM or Warner Brothers. Some content gurus in the online community have predicted that an 80-movie schedule for the coming year will be too much for Netflix to handle, meaning most of these original titles will flop. However many of them will be from local production firms around the world, and don’t necessarily reflect US costs.

Of course this overshadowed the impressive figures, adding 850,000 domestic subscribers to reach 51.35 million paid memberships, showing that its mother land is not saturated just yet. Internationally it added 4.45 million subscribers to total 52.68 million paid subscribers.

Total third quarter revenue was just shy of $3 billion at $2.85 billion, a milestone Netflix is fully expected to surpass next quarter. Revenue grew 30.3% year on year, although this was a slight slow-down. US streaming profit grew 16.6% year on year to $554 million from revenues of $1.55 billion, up 18.6%.

A big breakthrough came from its international streaming results, posting profit of $62 million from revenues of $1.33 billion, after a loss of $69 million in the same period last year.

Something we have been waiting a while to hear about from Netflix execs is the Disney divorce announced back in August, in which Disney pulled its content from Netflix to pursue its own standalone streaming ambitions. CCO Ted Sarandos isn’t bitter, saying on the investor’s call this week that Netflix will be “thrilled to partner with Disney when it’s ready.”

“Disney is a great brand with great content but internationally we only have it in the Netherlands, Australia and Canada. You saw how big our international growth was in most of the world without Disney content. So although it’s got an enormously significant brand, in terms of its significance relative to growth, you can see that we’ve done very well in international without it,” added Sarandos, who has a very good point.

Today some two thirds of Netflix’s content comes from third party licensing deals but this balance is gradually shifting. Netflix was fundamentally built on Disney (and Sony) content, something Disney has regretted ever since around 2011 when the business really started to pick up pace. Disney isn’t alone, there are many content distributors that rue the day they helped Netflix become a global success story, and we expect Disney’s decision to accelerate this process by encouraging more studios to jump ship. In a few years’ time, the balance of original content to third party will be 50/50 – or maybe even higher if Netflix’s momentum continues.

Sarandos said, “I think that everyone is going to have their own strategies and it’s exciting that everyone is trying to make OTT television better and better. I think that is good for all of us. And we just have to worry about creating content that our members can’t live without and get excited about every month. Whether or not one of our partners decide to produce for us or compete with us, that’s really a choice they have to make based on the own business.”