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Netflix Struggling With Market Saturation

Posted on Tuesday, Jul 19th 2016

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Five years ago, Netflix (Nasdaq: NFLX) announced plans to increase its subscription cost and the announcement had backfired. The stock tanked, subscribers fled and the company had to recall its decision. For the last two years now, the company has been gradually increasing its prices again. New subscribers are being added at a higher cost subscription and grandfathered rates are finally going away. But the market is still not happy.

Netflix’s Financials

Netflix’s Q2 revenues grew 28% to $2.11 billion, in line with the market’s forecast. EPS of $0.09 was better than the Street’s projections of $0.02 for the quarter. By segment, US streaming revenues grew 18% over the year to $1.21 billion and international streaming revenues grew 67% to $758 million. DVD revenues continued to decline to $70 million for the quarter.

But while the company may have met expectations on financial metrics, it was a different story for the operational metrics. Netflix added a mere 160,000 new streaming subscribers in the US. In April, it had forecast an addition of 500,000 new US streaming subscribers. A year ago, it had added 900,000 new streaming subscribers in the country. International growth also appears to be slowing down as it added 1.52 million subscribers compared with a forecast of 2 million given in April and an addition of 2.37 million a year ago. Netflix ended the quarter with 83.18 million streaming video subscribers worldwide, including 47.13 million in the US.

For the current quarter, Netflix projected an EPS of $0.05. It did not provide a forecast for the revenue numbers. Analysts were projecting revenues of $2.26 billion with an EPS of $0.07 for the quarter.

Netflix’s Worries

Netflix attributed the disappointing subscriber numbers to the media coverage on the price increase, especially for the subscribers with grandfathered rate plans. But Netflix is not too fazed. According to its CEO, Reed Hastings, “While un-grandfathering and associated media coverage may moderate near-term membership growth, we believe that un-grandfathering will provide us with more revenue to invest in our content to satisfy members, thus driving long-term growth.”

Netflix has not quantified the number of subscribers that will lose their grandfathered price advantage, but analysts estimate that more than 20 million subscribers will be hit by a price increase of as much as $2 per month in the second half of this year. Besides losing some of these older customers, Netflix is also finding it difficult to attract new customers in a market that is already fraught with competition from other streaming services including Amazon, Hulu, and Google’s YouTube and from traditional media players like Time Warner and HBO.

Meanwhile, outside the US, Netflix is struggling with profitability. Its planned expansion into 190 countries has come at a cost. During the quarter, Netflix’s international operations recorded a loss of $69 million compared with profits of $414 million earned in the US.

An international user base also means that Netflix has to invest in a more diverse content library. Netflix is already expected to spend more than $6 billion this year on original content including 10 feature films, 30 children’s shows, and 12 documentaries. During the last quarter, Netflix released its fourth season of Orange is the New Black and its second Adam Sandler film The Do Over. Besides original content, the company is also tying up with other networks for additional content. It extended its licensing agreement with the CW Network to become the network’s Video on Demand service provider for earlier seasons of all scripted series broadcast on The CW with the 2015-16 season. Subscribers will be able to stream full seasons of programs, including Legends of Tomorrow, Supergirl and The Flash, just eight days after each season finale. Netflix will also have exclusive access to the new Star Trek series from CBS outside of US and Canada in its international markets within 24 hours of the episode’s North American premiere.

Its stock is trading at $98.81 after recovering from the 15% slide it reported post the result announcement. Its market capitalization stood at $42.3 billion. The stock touched a 52-week high of $133.27 in December last year and had fallen to a 52-week low of $79.95 in February this year.

Photo Credit: Alan Levine/ Flickr.com 

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