$6 Billion Reasons Netflix Can’t Afford to See Subscriber Growth Stall

netflix Subscriber Drop

Netflix chief content officer Ted Sarandos said this month that the service intends to spend more next year on original and licensed content than the $6 billion it spent in 2016. But before issuing more projections, he may want to review his second-quarter subscriber totals.

Netflix had forecast 500,000 new U.S. subs in Q2 but ended up with just 162,000. The company blamed negative media coverage of its impending price hike, rather than the hike itself, which hit relatively few customers in the quarter and continues to roll out through the rest of the year.

More worrisome was a drop in international subscriber additions, especially considering that the price increase applied in only a handful of countries. Overseas, 1.5 million people signed up, rather than the 2 million Netflix had projected. This is problematic because the streaming service relies on rapid growth to cover its escalating investments.

sources: Company Reporting, jackdaw research Analysis

When you compare Netflix’s contractual commitments to pay for content for the year ahead to its revenue on a trailing four-quarter basis, you get a sense of what the company has brought in from subscribers vs. what it’s due to spend.

For the last couple of years, content obligations due over the coming 12 months have been at just under 80% of trailing four-quarter streaming revenue. To look at it another way, today’s content obligations for the coming 12 months are typically equivalent to revenue a year earlier, such that Netflix has essentially a year of buffer between the amount it spends on content and the revenue it generates.

sources: Company Reporting, jackdaw research Analysis

This has worked so far because Netflix has been increasing streaming revenue at about 30%-35% per year. But if growth slows, the gap between spending and revenue will shrink quickly. In addition, Netflix has $3 billion-$5 billion of content commitments due over the coming years that aren’t included in its content-obligation figures, because the titles haven’t been named yet. Include those, and the gap likely shrinks further.

Over the past two years, Netflix has been spending 85% of its international revenue growth on international content commitments, compared with only 30% of U.S. revenue growth on domestic commitments. Should overseas revenue growth slow, Netflix could find itself paying out essentially all its new revenue in content licensing fees.

Netflix has only had a single quarter of slow growth, so it’s far too soon to panic. The next quarter will be telling, considering that the price hike may be more keenly felt. But the subscriber growth numbers are well worth watching over the next few quarters.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

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  1. Jacques Strappe says:

    I only subscribed to Netflix for the original Marvel series. While I do watch some of the other original and second hand content, I am only sustaining my subscription for the new Marvel content. When that ends, I will probably drop Netflix. When I subscribed to Amazon Prime, it was based on the free shipping since I use the retailer often enough to justify a Prime membership. I do watch some programming on Amazon now as well but if they eliminated their Prime television altogether I would still pay for the Amazon Prime service–the video is a perk but not a necessity to me. At some point, as more new streaming services come online, they will begin to cannibalize themselves. I also believe it is unfortunately not “if” but when Netflix begins to offer their content with commercials to help defray their costs. I hate commercials and would probably consider dropping any streaming service that includes them. I don’t have a bottomless bank account either so if these streaming services continue to cost more and more, it won’t keep me subscribing to them, regardless of the programming offered.

  2. Bill B. says:

    I’ve had Netflix for years, but I only have it for movies, so perhaps someday this will no longer work for me. I didn’t originally subscribe for TV series. I subscribed to get away from them.

  3. EricJ says:

    The drop in subscribers is for the EXACT SAME simultaneous reason as the rise in original programming:
    Studios, trying desperately to sell their own Digital VOD, see subscription Netflix, Hulu and Amazon Prime as their “enemy”, and starve them out of the mainstream 20th-century studio movies they used to license for play.
    A new subscriber is going to be excited about the new seasons of Orange and Luke Cage, a longtime subscriber is going to be furious that the “real” movies are disappearing, being replaced by telenovelas, activist documentaries, and Sundance indies.

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