Netflix saw its US subscriber numbers fall for the first time – James Pearce asks if there is a rocky road ahead for the streaming giant.

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Netflix: Shares down 10% since report announcement 

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Financial results, a quarterly staple of most industry’s calendar, offer an interesting insight into the key players’ current – and future - strategies, and how these are playing out.

When Netflix unveiled its Q2 results earlier this week, it disclosed a fall in US subscribers for the first time since it was launched, leading to its share price tanking by 10%.

The company lost approximately 130,000 subscribers in the United States in Q2, with CEO Reed Hastings pointing the finger at the lack of original content to bring in new subscribers, along with recent price hikes of up to 18% in some regions

Still, Netflix’s overall subscriber base continues to grow, up 2.7 million worldwide in the April-June period. This was below its forecast and the streaming giant admitted it had missed forecasts across all regions, but this was “slightly more so in regions with price increases.”

Netflix has been on an upward trend, stock market wise, despite the threat of increased competition looming. Prior to the Q2 results, it had seen stock prices grow by almost 35% this year. Netflix’s subscriber base has also now topped 150 million for the first time, it said.

The company says it expects to see growth again in the US – by far its biggest market with over 60 million Americans signed up to a subscription – during the next quarter thanks to the release of new seasons of two of its biggest hits – Stranger Things, which landed earlier this month, and Orange is the New Black, which will land at the end of July.

Increasing competition
It is this – more original content – that could play a key role in the firm’s strategy going forward. A report from MoffettNathanson and HarrisX found that 15 out of the most popular top 20 shows on the streaming platform are Netflix Originals, topped by Orange is the New Black and Stranger things.

In his SVOD market tracker Michael Nathanson, a partner at MoffettNathanson and a speaker at IBC 2019’s Leaders Forum, the risk of losing high-quality comfort content is “misunderstood”.

“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,” he said, according to Light Reading.

The four acquired shows that make up the top 20 are The Office (No 9), Friends (No 10), Supernatural (No 12) and Breaking Bad (No 20), and this highlights the challenge Netflix is facing.

Like many other major broadcasters, NBC is set to launch its own streaming platform and has already announced The Office will air exclusively on the service from 2021. The Office was reportedly Netflix’s most popular show in 2018.

WarnerMedia is also set to launch an SVOD service, called HBO Max, and has already announced The Fresh Prince of Bel Air, Pretty Little Liars and megahit Friends – one of Netflix’s top 20 shows – will be shown exclusively on the service.

With Disney having already cancelled future Marvel shows that were airing on Netflix, such as Daredevil and Jessica Jones Netflix faces the question of what is left for it to pick up?

Netflix claims losing these rights will “free up budget for more original content” and given it spent an estimated $100 million to acquire the rights to Friends that may be true. It is certainly committing to this, having recently signed a deal to open a new UK production hub at Shepperton Studios.

But the challenge is in creating the right content to attract subscribers. For every Stranger Things which has received repeatedly rave reviews from critics, there is an Insatiable which has just a 13% score on Rotten Tomatoes.

Paolo Pescatore, a tech media and telco analyst at PP Foresight, said in order to attract and retain subscribers, Netflix has to “create more blockbuster hits.”

13 reasons why netflix 4k show

13 Reasons Why: “Netflix has to create more blockbuster hits”

Source: Netflix

“This will be key in its core domestic market, given the launch of new services,” he added. “Its overseas markets will continue to attract new subs thanks largely to its successful partnership strategy with cable, pay TV and telco providers.”

“For sure expect more key licensed programming to be pulled off its catalogue as rivals seek to differentiate their own offerings.”

Netflix has spent big on content in recent years. The streamer splashed around $12 billion on content in 2018, up 35% on the previous year, according to its fourth-quarter earnings report. It does not disclose the split between original content and rights for existing content, so it’s difficult to break this figure down.

An Economist report projected the 2018 figure at $12-13 billion – vastly more than traditional studios have been spending.

Yet there is some confusion around what this strategy might look like. According to a report from The Information, Netflix is planning to be more selective around its big budget projects going forward.

Chief content officer Ted Sarandos reportedly told some Netflix executives that the company’s spending needs to be more cost-effective in terms of the viewership for a show. Sarandos is calling for shows and movies to bring in audiences that make up for a high production spend.

Overall, Netflix must diversify and broaden its business model, including looking at new services, said Pescatore.

“It cannot solely rely on annual price increases to grow revenue and reduce its burgeoning debt and content obligations,” he explained.

“Big battles lie ahead and video represents a key area for the online and tech giants. It opens up new business models in advertising, subscription, transaction as well as others including merchandise.”