Netflix's subscriber growth slows as streaming competition rises
When COVID-19 spread throughout the world, millions of people sought comfort in Netflix as they sheltered at home. Subscriptions skyrocketed in the first half of the year, but as expected, the accelerated pace of growth was unsustainable.
In the third quarter, Netflix added 2.2 million subscribers, just under its projection of 2.5 million and far lower than the previous quarter's addition of 10 million subscribers. The company now has 195.15 million subscribers globally.
Revenue in the third quarter grew 23% to $6.4 billion and net income was up 19% from the same period a year earlier to nearly $790 million.
The company beat analysts' expectations on sales but missed on net income and new subscribers. Analysts had projected $6.39 billion in sales, and net income of $969 million in the quarter, according to financial data company FactSet.
Despite the growth, investors were disappointed by the results, which were released after markets closed. In after-hours trading, the company's shares fell 5% to $498.86. Netflix shares had closed at $525.42 on Tuesday, down 1%.
"The market expects Netflix to outperform everybody else significantly, claiming such an unrealistic expectation," said Maribel Lopez, founder of Mount Pleasant, S.C.-based Lopez Research.
The Los Gatos, Calif., company remains the king of streaming, a dominant player in a sea of rivals including Disney+, Apple TV+ and HBO Max. Netflix had warned that subscriber growth would slow down in the second half of the year because many consumers had already signed up earlier.
Netflix said in a letter to shareholders Tuesday that it has already added more subscriptions this year than it did all of last year. The company said it added 28.1 million subscriptions in the first nine months of the year, compared with the 27.8 million subscriptions added last year.
"Where we are in the market cycle right now is basically capturing subscribers from other services," Lopez said. "This is a real challenge for Netflix, because they're the service that everybody else is going to try to capture, so not only do they have to maintain their subscriber base, they have to try to grow their subscriber base at a time where it's intensely competitive."
Netflix may have lost some subscribers due to controversy surrounding "Cuties," a French film that began streaming on the platform in September, analysts said.
Some legislators criticized the film and a Texas grand jury recently indicted Netflix over the "promotion of lewd visual material depicting a child." Netflix has stood by "Cuties," with co-Chief Executive Ted Sarandos calling it a "personal coming-of-age film."
"We think this could weigh more heavily on Q3 net adds than investors realize," said Steven Cahall, a senior analyst at Wells Fargo in a research note.
Cahall cut his guidance for Netflix's subscriber adds in half to 2.5 million, but remains supportive of the company, recommending investors hold on to the stock. "To be clear we think the current controversy and elevated churn is essentially a flash in the pan for Netflix," Cahall wrote.
Many entertainment companies, including Netflix, have dealt with delayed productions and increased costs due to the pandemic. Earlier this month, the company canceled the comedy "GLOW" after it had been renewed for a fourth season. Netflix also did not renew the drama "Away" starring Hilary Swank.
The company said Tuesday that it expects the number of its original programs to increase each quarter in 2021 compared with the year-earlier period.
"We're confident that we'll have an exciting range of programming for our members, particularly relative to other entertainment service options," Netflix said its letter to shareholders.
Popular titles on Netflix in the third quarter included the thriller "The Old Guard," drawing 78 million households, and Ryan Murphy’s thriller series “Ratched,” drawing 48 million households in its first four weeks. The “Indian Matchmaking” series captured a quarter of its subscribers in India and was watched by millions outside India in its first four weeks, Netflix said. The company counts a view as at least two minutes of watching.
Since the pandemic shut down many productions in mid-March, Netflix said, it has finished principal photography on more than 50 productions and is expected to finish shooting on more than 150 other productions by year's end.
“Materially, we are back in business in production in most places in the world,” Sarandos said in an earnings presentation.
Since Sarandos was appointed to his current position in July, Netflix has experienced high-level executive turnover. Sarandos named Bela Bajaria to oversee Netflix's global TV content business. The promotion was followed by other management changes, including the departures of longtime TV executive Cindy Holland and vice president of original series Jane Wiseman. Earlier this month, Channing Dungey, vice president of original content, left Netflix to become chairwoman at Warner Bros. TV group.
Sarandos said he promoted Bajaria because of her impressive work on building Netflix's unscripted group and local language originals team. Some of the shows that Bajaria brought to the streamer included "Master of None" and "Unbreakable Kimmy Schmidt."
"Whenever you put new change at the top, there's some downstream effects as well," Sarandos said.
Some analysts are expecting Netflix to raise subscription prices in the U.S. this year or next year after the company increased its Canadian subscriptions this month. The company recently ended 30-day free trials of Netflix in the U.S.
Netflix also plans to hold a promotional event in India at which customers can try out Netflix free for a weekend.
For the record:
6:45 PM, Oct. 20, 2020: An earlier version of this report misspelled Netflix executive Bela Bajaria’s last name as Bejaria.
This story originally appeared in Los Angeles Times.
