Netflix didn’t add nearly as many subscribers as the company projected it would in the second quarter of 2019, and saw a loss in US subscribers for the first time since 2011, when the company separated its DVD mail-order system and streaming platform.
The company lost approximately 130,000 subscribers in the United States in Q2, and only gained 2.7 million global subscribers, after projecting it would add 5 million. CEO Reed Hastings blamed the stagnancy on the company’s price hikes, and a lack of original content to bring in new subscribers. The company instituted higher pricing plans in January, one of its biggest increases to date. Plan changes went into effect for both new and returning subscribers. As such, paid memberships in the United States were “essentially flat.”
“Our missed forecast was across all regions, but slightly more so in regions with price increases,” Hastings wrote in his letter to shareholders. “We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions.”
The news has led to an immediate stock drop for the company. Hastings’ letter to investors argues that the company’s next two quarters will see growth because of new seasons of Netflix successes like Stranger Things, La Casa de Papel (Money Heist), The Crown, and Orange is the New Black, which is getting a final season. Still, the stock drop and Disney, WarnerMedia, Apple, and NBC Universal’s race to create the first “Netflix killer” may be a sign that confidence in Netflix is waning.
Now Hastings, who once famously declared that Netflix’s biggest competitor is sleep, is trying to gain that confidence back. The CEO addressed the loss of Friends and The Office, two of its most watched shows, in his letter.
“Much of our domestic, and eventually global, Disney catalog, as well as Friends, The Office, and some other licensed content will wind down over the coming years, freeing up budget for more original content,” Hastings wrote. “From what we’ve seen in the past when we drop strong catalog content (Starz and Epix with Sony, Disney, and Paramount films, or second run series from Fox, for example) our members shift over to enjoying our other great content.”
Netflix is still the leader in the streaming industry, but Hastings and other executives know competition is looming. Disney and Apple are gearing up to launch their respective streaming platforms this year, ushering in a wave of new tentpole series. Disney, which will charge $6.99 a month, also has a large catalog of fan and family favorites, and it’s bringing some of its most popular characters from Marvel and Star Wars movies to new TV shows for its service. Apple is reportedly spending up to $15 million per episode on its series See, starring Jason Momoa — more than HBO spent on episodes of Game of Thrones.
Executives at Netflix know they have to invest in new series that can take the place of Friends and The Office, but the company is already projected to spend more than $15 billion on content this year.
“Library content won’t kill the Netflix US subscriber story, however, it will force them to continually spend on riskier, high-profile concepts, market their shows more aggressively, and allow competitors to copy Netflix’s initial approach in building out their own services,” analyst Michael Nathanson wrote in a new report ahead of Netflix’s earnings call.
While Disney, Apple, WarnerMedia, Amazon, and NBC Universal continue to flash their upcoming projects as a way to attract some of Netflix’s subscribers, Netflix is trying to show its strength. The company released some new viewership numbers in its earning report, adding to recently reported statistics for series like Stranger Things’ third season, which saw more than 40.7 million household accounts watching some part of season during its first four days of release, according to Nielsen.
When They See Us, Ava DuVernay’s critically acclaimed documentary series, was watched by 25 million households in its first four weeks, according to the letter. Netflix counts a view as one account watching at least 70 percent of a title. The nature documentary Our Planet was watched by 33 million households in its first four weeks. Adam Sandler’s Murder Mystery is also one of Netflix’s most-watched original movies, with more than 73 million households watching the movie in its first month.
A big part of Netflix’s overall strategy to remain on top of the streaming food chain is continuing to excel in territories the competition isn’t targeting. The majority of Netflix’s growth over the last few quarters has come from international markets — an area Hastings has talked about expanding into for close to five years.
Netflix already has a major presence in these spaces, and it’s investing heavily in localized content for specific regions. Other companies haven’t spoken about similar investment strategies in the lead-ups to their launches. Netflix executives are planning to pump even more resources into international content development as an effort to stay ahead of the competition.
“We forecast Q3 global paid net adds of 7 million,” Hastings wrote, with 6.2 million of those accounts coming from international markets. “Our internal forecast still currently calls for annual global paid net adds to be up year over year.”