Netflix adds another whopping 10 million subscribers, but warns growth may slow

[Karlston]

Netflix adds another whopping 10 million subscribers, but warns growth may slow

All eyes on the streaming giant after a massive first quarter

Illustration by Alex Castro / The Verge

Netflix is still growing as people continue to shelter in place around the country, but the company is now seeing the slowed subscriber growth executives predicted would arrive three months ago.

 

On top of announcing that longtime chief content officer Ted Sarandos would join CEO Reed Hastings as co-CEO, the company made a few impressive announcements. Netflix added 10.2 million subscribers in its second quarter, beating the company’s own estimates that it made in its first quarter, which suggested it could add around 7.5 million.

 

Netflix noted that it added 26 million paid new subscribers in the first two quarters of 2020 alone; in 2019, the company added 28 million subscribers in total. The company’s revenue grew 25 percent year over year, but missed its revenue goals for the quarter. The undeniably strong performances of the first two quarters are something the company is proud of, but executives still warning investors about reading too much into. Netflix is anticipating adding 2.5 million subscribers in its third quarter, down from 6.8 million in last year’s same quarter.

 

“As a result, we expect less growth for the second half of 2020 compared to the prior year,” the letter to shareholders reads. “As we navigate these turbulent circumstances, we’re focused on our members by continuing to improve the quality of our service and bringing new films and shows to people’s screens.”

 

As Netflix settles into its “new normal,” a term that companies are using to define navigating the current pandemic landscape, there are a couple of big questions that Netflix will have to answer. One is how much more can Netflix grow, and whether the company’s executives can provide a clearer picture of how much the pandemic is accelerating its business.

 

The other, and arguably the most important one for Netflix subscribers, is how much longer Netflix can keep up its rapid pace of releasing new titles. Netflix’s core advantage is its seemingly never-ending lineup of movies and TV shows that keep people’s attention. But as questions loom over when film and TV production can kick off again, there’s a possibility that Netflix may have to hold back.

 

“For 2021, based on our current plan, we expect the paused productions will lead to a more second half weighted content slate in terms of our big titles, although we anticipate the total number of originals for the full year will still be higher than 2020,” Netflix’s shareholders letter reads.

 

While new streamers like Peacock (NBCUniversal) and HBO Max (WarnerMedia) are facing major programming delays for some of their initial original titles because of the pandemic, Netflix is serving up a whopping number of new titles for people to watch. This month alone, Netflix is set to release 59 new TV seasons, movies, and documentaries, among others. In comparison, Disney Plus and Apple TV Plus each had two notable originals. Amazon Prime Video, Hulu, and HBO Max had a smattering of originals, but none came close to Netflix’s output.

 

Back in April, Netflix’s chief content officer Ted Sarandos said that the company wasn’t worried about output, but that was three months ago. “Netflix will certainly have to keep up with it,” Steve Nason, a senior media analyst at Parks Associates, told The Verge. “Netflix has been able to transform themselves as an original content powerhouse. They still have to keep that output up to an extent, especially with each of these new major competitors figuring out different ways to go about grabbing subscribers. The key thing is the exclusivity of it all.”

 

Unlike Disney Plus or HBO Max, Netflix doesn’t have a wealth of classic shows and movies it can just offer to people, so its strategy is creating as many originals as possible and licensing other titles — especially from international markets — the company can label as “Netflix Originals.” That’s on top of paying for blockbuster movies like Extraction and Spenser Confidential, which Netflix told Bloomberg amassed 99 million and 89 million streams within the first four weeks of their release. The company has become the new home for the summer blockbuster with theaters still closed around the world.

 

Now, with Charlize Theron’s The Old Guard, and highly anticipated shows like The Umbrella Academy’s second season, Netflix is proving to be the season’s dominant streamer. “Netflix is establishing themselves as one of the core foundational services people have to have,” Nason said. “They have such a low churn rate compared to competitors, and that’s because, in part, of their low cost and content output. It would take something extraordinary for many of its subscribers to get rid of Netflix. It makes them the number one foundational service.”

 

The big challenge that Netflix’s unprecedented growth last quarter set up for the company is determining how many more subscribers the service can find. Netflix’s earlier prediction essentially said that around 7.5 million people would sign up in April, May, and June, instead of late March. That’s when stay-at-home orders first went into effect in the United States en masse and people were clamoring for more entertainment.

 

Considering that growth in the United States has mostly slowed over the last 18 months — with the understanding that most people in the United States who want Netflix probably already have Netflix — being able to add millions of subscribers in three months is still an impressive feat. As predicted, most of those subscribers are coming from international territories. Now, Netflix’s new guidance for investors is that “growth is slowing as consumers get through the initial shock of Covid and social restrictions,” the letter reads.

 

“There are a decent amount of people who have never been exposed to Netflix before, even though they’re the most used service, so when COVID hit, Netflix benefited from that growth,” Nason said.

 

What’s clear is that parts of Netflix’s business are continuing to benefit from the pandemic, but the uncertainties around how long this will last means Netflix will also have to start preparing. Netflix is trying to reenter production in countries where it’s possible to do so, including Iceland and other parts of Europe, and to license content where they can. But that’s true for Netflix’s competitors, too, and it’s here that Netflix’s stance as a leader in the space is helping it weather the storm.

 

“What happens with Netflix impacts the entire space,” Nason said. “If there is a true leader in the SVOD space, it’s Netflix, and what happens with them or to them can, and likely will, ripple down to the other services.”

 

 

Netflix adds another whopping 10 million subscribers, but warns growth may slow