Despite Mixed Q4 Earnings, Netflix Remains The Top Streamer

Today, Netflix announced its fourth quarter earnings for 2018 and the findings were mixed. While the streamer beat Wall Street estimates for earnings per share, it fell short on revenue and stocks were down roughly 4% in extended trading. But, in more positive news, subscriber additions soared with 139 million subscribers worldwide.

The last quarter of 2018 saw the addition of 8.8 million subscribers (7.3 million internationally and 1.5 million domestically). In total, last year brought an additional 29 million subscribers to Netflix.

Analysts concur the last quarter of 2018 was mixed, but according to eMarketer Principal Analyst, Paul Verna, it was solid. "The most important metric is subscriber base, which translates into business, and as far as those numbers, Netflix remains the leader in the SVOD game.”

Investors, he adds, have certain expectations and when those aren't met, there's a negative response. "Netflix isn't a company that plans business around making the quarter. Netflix plays the long game and in looking at the bigger picture and what's ahead next, they're in good shape." 

Though investors may have been disappointed, the company beat expectations on subscribers and EPS. “The fact that investors reacted negatively to what amounted to a strong performance indicates the extent to which Netflix has set a high bar. Netflix's 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. The bottom line is that Netflix remains the uncontested leader in the subscription video space."

Another important point to make is the high quality of its original content. The streamer has solidified itself as a strong competitor artistically, scoring 112 Emmy nominations against HBO’s 108, with the two leading the pack. Though Netflix didn’t break HBO’s incredible 17-year run, it did tie with 23 wins. 

In addition, Netflix did very well at the Golden Globes with five wins, including Roma winning two awards for Best Motion Picture (Foreign Language) and Best Director (Motion Picture) for Alfonso Cuarón. The highly acclaimed film is also a good one to bet on for Oscars consideration.  

Netflix also got attention for its small-screen hit The Kominsky Method, which won Golden Globes for Best Television Series (Musical or Comedy), a first for the streamer after Amazon nabbed it three times before, as well as Best Performance by an Actor in a Television Series (Musical or Comedy) for Michael Douglas.  

With awards recognition and original films like the Sandra Bullock-helmed horror film Bird Box, which premiered in late December 2018 and has already been viewed by a record 80 million subscribers, getting Netflix a lot of attention, it’s highly likely subscribers will absorb price hikes if the content they're paying for is worth it.

Tuesday’s announcement of rising subscription costs of $1 to $2 a month (depending on plan) for its nearly 60 million U.S. customers caused a stir but again, if you give your subscribers what they want, they'll pay. This money could add upwards of $1 billion-plus to the streamer’s annual revenue, which the subscriber gets back in spades in the form of high quality entertainment.

“Our research shows that Netflix subscribers are less likely to unsubscribe than customers of any other streaming services,” says SVP, Global Media and Entertainment at Magid, Mike Bloxham. “The ripple effect of Netflix raising its price may be that some people will drop another service. Consumers report being willing to spend an average of $38 a month on all streaming services.” 

Bloxham adds that though the price hike won’t be a popular move, as price hikes never are, it won’t cost Netflix subscribers. “Few people will jettison the service and some of those that do will return in due course. By raising their monthly fee, Netflix has just taken a larger share of the total notional spend, arguably putting greater pressure on others to claim and hold onto their share of what remains.”

“I don’t think the Netflix price hike will drive users away,” adds Verna. “Even with an increase of $1 or $2, it’s still a good value compared with, say, HBO Now, which delivers comparable value but is more expensive. With the exception of when Netflix separated its streaming and DVD businesses, the company’s price increases have not had a negative impact on subscriber levels. I don’t expect this case to be different, even taking into account the fact that $2 is a larger increase than past ones.”

Netflix’s success over the past several years has resulted almost entirely from its reinvention of TV viewing and distribution, adds Verna. "More recently, with the release of its critically acclaimed feature Roma, the company seems committed to extend that disruption to the film industry. It will have plenty of competition from Amazon, which is in the midst of a similar transition, and potentially other players who also see an opportunity to challenge the status quo in Hollywood. Popcorn sales may be affected, as well!” 

In 2019, analysts at eMarketer expect that in the U.S. Netflix will have upwards of 157.3 million individual users, a jump of 6.6% over last year, capturing nearly 86.7% of U.S. subscription OTT video users. These numbers are based on eMarketer’s estimates that there are approximately 2.5 users for every one paid Netflix subscription. In total, OTT viewership in the U.S. will grow this year by 2.5% to nearly 205 million people, just over 72% of all internet users domestically. Worldwide, eMarketer expects Netflix to have 379 million individual users this year, which is a jump of nearly 14% over last year.  

Netflix will face increased competition with more and more jumping into the streaming game, but Verna doesn’t see this as a concern. “As far as competition goes, in the next two years Netflix will face a significantly more competitive market than before, with at least Disney, AT&T and NBCUniversal launching new services. Not only will these rivals give consumers more options, but in the cases of Disney and NBCU, they’ll also take specific content franchises off the Netflix platform. It’s a double-whammy: new services ratcheting up competition, and desirable content being pulled off of Netflix."

Netflix, in its long-game approach, seems more than prepared for this. In its letter to shareholders the company stated, “As a result of our success with original content, we’re becoming less focused on second run programming.”

"Netflix has fortified itself against these changes by creating must-see programming, not just on TV but also in feature films," explains Verna. "The company is the clear leader among premium, subscription-based services. It has consistently beaten back established competitors like Amazon and Hulu, and it will try to do the same with emerging ones. It’s still a content-king world, and Netflix has extremely desirable, even essential, content.”