In reporting its Q4 results, Netflix has revealed it finished 2018 with 139 million paying memberships, up 9 million from quarter start and up 29 million from the beginning of the year.
The SVoD service grew annual revenue 35 per cent to $16 billion in 2018, and nearly doubled operating profits to $1.6 billion, though this was short of Wall St expectations. Netflix said that as expected, Q4 operating margin dipped to 5.2 per cent vs. 7.5 per cent prior year as a result of so many titles launching in the quarter.
Netflix added a record 8.8 million paid memberships (1.5m in the US and 7.3m internationally), higher than its beginning-of-quarter expectation for 7.6 million paid net adds and up 33 per cent year over year. For the full year, paid net adds grew 33 per cent to 29 million vs. the 22 million it added in 2017.
In a Letter to Shareholders, Netflix advises that it changes pricing from time to time as it continues investing in “great” entertainment and improving the overall Netflix experience. “We want to ensure that Netflix is a good value for the money and that our entry price is affordable. We just increased our US prices for new members, as we did in Q4 in Canada and Argentina, and in Japan in Q3. The new pricing in the US will be phased in for existing members over Q1 and Q2, which we anticipate will lift ASP,” it advises, adding that its multi-year plan is to keep significantly growing its content while increasing its revenue faster to expand its operating margins.
In terms of content, Netflix says it is making significant investments in productions all over the world “because we have seen that great stories transcend borders”. For example, Bodyguard (co-produced with BBC One, from ITV Studios) ranks as one of its most enjoyed co-productions. Baby, its second original series from Italy, and The Protector, its first Turkish original series, both saw strong viewing both inside and outside their home countries. All three of these debut seasons from around the world were each enjoyed by over 10 million member households in their first four weeks. Netflix says that a result of its success with original content, it is becoming less focused on second-run programming.
In terms of competition, Netflix notes that in the US, it earns around 10 per cent of television screen time and less than that of mobile screen time. In other countries, it earns a lower percentage of screen time as a result of lower penetration of its service. “We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) Fortnite more than HBO. When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time. Hulu is small compared to YouTube for viewing time, and they are successful in the US, but non-existent in Canada, which creates a comparison point: our penetration in the two countries is pretty similar. There are thousands of competitors in this highly-fragmented market vying to entertain consumers and low barriers to entry for those with great experiences. Our growth is based on how good our experience is, compared to all the other screen time experiences from which consumers choose. Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”
TMT analyst Paolo Pescatore described the results as “a modest quarter to end a mixed year for Netflix,” suggesting that the year ahead will be pivotal. “More providers will be launching SVoD services and they will want to pull their programming off Netflix. Also, expect the likes of Apple to make significant moves in video/TV, leaving the market awash with video services. “Users will be spoilt for choice, maybe a bit too much,” he says.
“Worryingly, the company is burning through a lot of cash. It needs to recoup this by adding customers more quickly, increasing prices or taking on more debt. Therefore, expect price rises in all key markets,” he advises
“Cable and telco partnerships will remain important for further subscriber and revenue growth over the next twelve months,” he says, reflecting Netflix’s comments in its Letter to Shareholders that it is also expanding its bundled offerings which now include: Telefónica in Spain, Comcast and T-Mobile in the US, Sky in the UK and Germany, Free in France, and KDDI in Japan.
According to Josh Krichefski, CEO at MediaCom, Netflix’s growing catalogue of exclusive shows and ongoing push to create original content is clearly reaping rewards, noting that recent hits such as Bird Box and Haunting of Hill House are generating the same buzz as Oscar-winning films. “This is all well and good but it does beg the question of how much longer Netflix can sustain itself without an advertising model, with the likes of Prime Video and NOW TV making up ground quickly. While Netflix currently leads the way in streaming platforms, investing millions and millions into its own content may not be enough to enjoy unbridled success in the future.”
“As streaming platforms continue to prove popular – together with the mass adoption of smart TVs – the door is open for brands and advertisers to join the conversation too. With the opportunity to deliver targeted ads on connected TVs, the likes of Amazon’s Fire Stick and Google’s Chromecast can seize the opportunity to deliver content in a smart, programmatically-driven way. It will be interesting to see how Netflix responds to a future of smart, digital TV advertising and whether it will be forced into an ad-based model to sate the increasing consumer demand for exclusive and engaging content.”