James R | On 19, Apr 2016

Netflix has hit 81 million subscribers around the world, following its global expansion at the start of the year – but tough times are ahead.

In January, the streaming giant launched in 130 new countries simultaneously, giving the site unprecedented worldwide reach. That reach, however, comes at a cost, and the company is just beginning to pay off the bill.

The site’s membership passed the 81 million mark in the first quarter of 2016, Netflix announced today, a staggering level of growth since its first streaming offering back in 2010. A record 6.74 million people signed up during those three months, up against the 4.88 million in Q1 2015 and beating the previous high of 5.59 million signed up in Q4 2015. That surge is thanks to the worldwide push at the start of the year, with a whopping 42 per cent of subscribers now located outside of the US.

That expansion, though, doesn’t come cheap: Netflix’s operating income was $49 million in Q1 2016, almost half the $97 million recorded a year ago, as it pumps money into international markets to pay for new content, marketing and third party content. And that work is far from over.

“We have lots of work to do to make Netflix more relevant market by market,” says CEO Reed Hastings in a letter sent to shareholders today.

“By expanding broadly at once, we are learning more quickly about how best to please consumers across a wide variety of cultures and markets.”

Indeed, in most of these markets, so far, Netflix is offered only in English and payment methods are limited primarily to international credit cards. In the coming quarters, the site will be adding more local languages, local content, payment options and customer support.

At home, meanwhile, growth is slowing: in the US, Netflix added 2.23 million members in Q1, slightly down on 2.28 million a year ago, and 2.25 two years ago. That slowdown, though, is still better than expected, as the company’s forecast for the quarter was low (at 1.75 million) because it underestimated the positive impact its original content released in those months would have upon attracting new customers – the first quarter of 2016 has seen Netflix diversify, with Daredevil Season 2, but also sitcom reboot Fuller House and a host of kids’ series.

img src=”http://vodzilla.co/wp-content/uploads/2016/03/daredevil-season-2-1024×699.jpg” alt=”Marvel's Daredevil” width=”700″ class=”size-large wp-image-28084″ />

The outlook is notably cooler. Netflix’s forecast for Q2 2016 is 0.5 million new members in the US and 2 million internationally (versus last year’s 2.4 million). That second figure came as a surprise to analysts, who had expected a forecast of 3.45 million – a surprise that caused Netflix’s share prices to drop today.

Netflix says that dip is due to a tough comparison against the Australia / New Zealand launch during the same period last year.

“The ANZ growth spike in Q2 last year resulted in international Q2 net adds more than doubling year over year (from 1.12 million to 2.37 million). While ANZ is growing steadily this Q2, it is less than the launch spike last year. Ex­ANZ, international net adds would be forecast up this quarter. International net adds are down sequentially both due to standard seasonality and our launch in 130 countries at very beginning of Q1 (so Q1 captured the initial surge of sign­ups).”

“On China, we are continuing discussions but have no material update on our approach or timing,” adds Hastings. “Whatever we do will have only a modest financial effect in the near term.”

In the US, while revenue rose 18 per cent year-on-year in Q1 2016, reflecting 14 per cent growth in average paid memberships, Netflix is predicting a flat year-on-year contribution margin in Q2, due to “a large slate of content releases and associated marketing”.

The slowdown in momentum arrives as Netflix faces another headwind: rising prices. The company increased its monthly fees a while ago, but froze the rates for older customers, who will now have their tariffs increased to the current rates from May onwards.

Netflix is rolling this out “slowly over the year, rather than mostly in May, so we can learn as we go”, says Hastings.

“Most of our grandfathered members are in the US, but we’ll take the same approach internationally. We expect only modestly increased churn from un­grandfathering, partially because these members have been with us for a reasonable period already, and because our content continues to improve.”

(Netflix promises it won’t change anyone’s price without their acknowledgement – older customers can expect to see a dialogue box about their options appearing soon.)

Once completed, though, the increase in revenue will help Netflix to fund its global footprint – and then continue its aggressive acceleration of original content production.

Indeed, Netflix is expecting to spend from about $5B in 2016 to over $6B (on a profit and loss basis) in 2017 on original content. Given the boost that it provided in the US at the start of 2016, the VOD giant is banking on that increase in worldwide, exclusive content to encourage steady growth everywhere.

The coming months see the arrival of its first French series Marseille, a political drama starring Gerard
Depardieu (5th May), new Japanese original series Hibana (June) and Netflix is also working on 3% in Brazil, Suburra in Italy, Dark in Germany, an untitled period series in Spain, a second season of Club De Cuervos and its second Mexican
original series, Ingobernable, starring Kate Del Castillo, as well as its first fully global original Japanese anime, Perfect Bones.

Original feature films are on the cards too, featuring talent from Adam Sandler to Brad Pitt. Netflix is now investing about 5 per cent of its content budget in original films, although that remains a partly experimental initiative as the company admits it is weighing up the commercial success (“more consumer excitement and member viewing”) of homegrown features against the popularity of third party acquisitions on a territory by territory basis. As Netflix seeks to offer subscribers the same library of content around the world, reducing its volume of third party titles to rely solely on exclusive originals is the logical step, as we’ve been saying for some time – but with rivals bidding for those rights (Sky recently inked a pan-European deal for first-run SVOD rights on Sony titles), will people still sign up just for Netflix’s original films and festival acquisitions? That is the question that will dictate Netflix’s next step in an increasingly competitive global market. The arrival of Ricky Gervais’ Special Correspondents, starring Eric Bana, this month may provide the beginning of an answer.

Add to Watchlist