Netflix’s latest earnings call saw it slightly miss analysts' revenue targets but over deliver on subscriber growth just as the company announced a price hike in the US.
The streaming giant boasted revenue of $4.19bn in the closing quarter of 2018, narrowly missing Wall Street’s projected $4.21bn. It will now introduce a US price hike from $11 per month to $13 in the hope of combating its sliding earnings (27% lower year on year).
The streaming service added 1.53 million subscribers in the US and 7.31 million internationally, outperforming analyst projections. Despite the optimistic projections, Netflix stock was down by 2.9% after the call.
Chief product officer Greg Peters said: "The model we’ve got is a fairly simplistic one, our job is to effectively invest the money that our subscribers give us every month so that we can give them incredible content in a better and better product experience. And if we do that well, we create more value for our subscribers and then occasionally, we’ll come to them and we’ll ask for a little bit more money, so that we can actually start that next cycle of investment.”
During the period, the company launched Sandra Bullock horror vehicle Birdbox, and it applauded the global response to the film that critics were tepid on. The company claims the movie drew 45 million viewers in its first week and clarified that it counts a ‘view’ as 70% completion. It does not release figures for independent validation, however, and Nielsen has pegged Birdbox viewership to closer to 26 million.
Netflix also launched a bold foray into interactive story-telling in the fourth quarter. Chief content officer Ted Sarandos reflected on the launch of Black Mirror tale Bandersnatch.
He said: “There have been a few false starts on interactive storytelling in the last couple of decades. And I would tell you that this one has got storyteller salivating about the possibilities.
“We’ve got a hunch that it works across all kinds of storytelling and some of the greatest storytellers in the world are excited to dig into it. To give you some sense that’s over five hours of content that’s produced for that episode for people to choose their own paths, and there’s countless ways that they could go and end up with. And that is an incredible challenge and of usually exciting thing that differentiates Netflix for creators.”
Analysts picked apart the performance of the Netflix.
Josh Krichefski, chief executive at MediaCom, said that Netflix’s growing catalogue of exclusive shows and ongoing push to create original content is reaping rewards. He wondered “how much longer Netflix can sustain itself without an advertising model?" and noted that rival services like Amazon Prime and Now TV are 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."
Time will tell how consumers handle price hikes. Consumer research from Audience Project found that 57% of subscribers say they would drop the service if it were ever to introduce ads. Whether they actually would stop Netflix and chilling is another matter. Ogilvy alumnus James Whatley pointed out the choice between Frosties and Sugar Puffs in Bandersnatch is already in itself an ad. During the call the company revealed that 73% of people picked Frosties which could be valuable exposure and insight for the brand.
Krichefski continued: “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.”
Paolo Pescatore, independent tech, media and telco analyst, outlined: “This tends to be a strong quarter for Netflix due to the holiday season. The year ahead will be pivotal. More providers will be launching SVOD services and they will want to pull their programming off Netflix. 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.” He warned. “Expect price rises in all key markets.”
Paul Verna, eMarketer media analyst, said: "The fact that investors reacted negatively to what amounted to a strong performance indicates the extent to which Netflix has set a high bar. Its paid subscriber guidance for Q1—arguably its most important metric—is somewhat higher than previously anticipated, which bodes well for the company as it prepares to face mounting competition from the likes of Disney, AT&T, and NBC Universal.”
Finally, Roni Cohen, director of data science from customer relationship firm Optimove outlined the challenge facing Netflix on its path to tie down subscribers: “Although subscription companies often prioritise acquiring customers, retaining these customers presents a whole new challenge in a fiercely competitive ecosystem. The stakes are especially high given that 80% of customers cancel new subscriptions within the first three months.
“If brands want to make the most of the subscription model, they must understand why consumers subscribe and why they cancel. Subscribers keep services if they feel the brand delivers an experience which resonates with them and adds value. Netflix consistently monitors its subscribers’ tastes and viewing habits and uses this data to make better decisions based on customers’ behaviour, purchase history, and preferences to engage them accordingly.”