Netflix ended 2018 with 139 million subscribers, narrowly beating expectations in a quarter dominated by an existential debate over the streaming giant’s biggest subscriber fee hike ever. The midterm elections may have gotten more coverage than the Netflix rate boost, but barely.
Netflix didn’t dwell on the price increase but it did pepper its earnings with an unusually copious amount of viewer data to showcase the success of its original productions. It needs the higher subscriber fees to help fuel a production push, which cost $7.5 billion last year and will rise in 2019. Executives said it was an expensive but winning proposition.
“Original film definitely changes the economics,” said chief content officer Ted Sarandos in a recorded interview posted on Netflix’ website. Producing films, versus licensing them in later windows “is a more kind of front-loaded cash activity but has a much bigger payback for us.”
Netflix estimated that its Susanne Bier-directed film Bird Box will be watched by over 80 million member households in its first four weeks on the service. Sarandos said the buzz around the film has created a “Netflix zeitgeist” of must-see television that helps retain and attracts subscribers — so it’s decided to share the number.
Netflix’ reluctance to reveal viewer data has been a source of frustration in the creative community. Is that changing? “It’s important for artists to understand the reach of their work,” said Sarandos.
Netflix added 8.8 million subs in the last three months of the year — 1.5 million in the U.S. and 7.3 internationally. It expects to add 8.9 million in the first three months, in line with previous quarters, indicating that the streamer doesn't expect a major hit from the price hike that is effective immediately for new subscribers. It will be phased in for existing customers over the next few months.
Netflix got its start with licensed programming but has been aggressively ramping up spending on original production around the world. It’s also facing growing competition. Disney+ is coming this year and NBC Universal just announced a new streaming service to debut in 2020. Chunks of Disney fare will disappear from Netflix and the Peacock might yank two of its most popular shows — The Office and Parks and Recreation — when their licenses are up.
Wall Streeters and industry players have been split over the price hike. Some call the 13%-18% boost pure good business, the only way to grow revenue, defray costs and pay down debt. They insist the streamer is at this point indispensable and won’t face much backlash for doing what cable operators have done year after year forever. Others think Netflix’ reliance on a single revenue stream — no advertising, no merchandising — may ultimately make it vulnerable. Several studies show consumers are sensitive to higher subscription costs.
Limelight Networks’ State of Online Video report said 62% of Americans cite price is the top reason they would cancel a subscription video on demand service, opting to stream video on a growing number of free ad-supported platforms.
Netflix let the numbers speak. It said its Spanish original series Elite has been viewed by 20 million households in its first four weeks. UK co-production Bodyguard, Italian original Baby and Turkish series The Protector were viewed by 10 million households in their first four weeks.
Netflix still licenses like crazy but Sarandos said many of its most-watched scripted series are originals.
And unscripted is the streamer’s first category with a majority of original content — up from zero two years ago, said CEO Reed Hastings.
He said Netflix had anticipated that Hollywood studios and networks would eventually start to hold back content for their own streaming services. “It’s a corner that we are glad we saw around.”
He played down the advance of Disney, NBC Universal and other rivals in the streaming space. Because, he said, Americans watch so much TV and there are so many players, from Xbox and Fortnite to YouTube and HBO, that none of them is worth worrying about. The company calculated that U.S. viewers watch 1 billion hours of television a day and Netflix makes up 10% of that.
“Disney has great content. We’re excited for their launch. Maybe in a few years they’ll grow to 50 million [subscribers]. But out of the billion [hours], we compete so broadly with all the providers that any single provider only makes a difference on the margins. So we don’t get focused on any one.”
Netflix' earnings per share of 30 cents was down 27% from the year earlier but above consensus of 24 cents. Revenue came in slightly shy of estimates at $4.19 billion, up 28% year-on-year.
Free cash flow for the quarter was negative $1.3 billion.
Netflix shares, up 0.51% at close Thursday, were trending lower in after-hours trading. The shares had soared in the first weeks 2019, including a 7% gain after the rate hike was announced earlier this week.
The company anticipated revenue of $4.9 billion and earnings per share of 56 cents in the current first quarter.
