David Farnor | On 17, Jul 2018

Netflix saw its subscriber growth slow in the second quarter of 2018, as it fell short of its own forecasts for expansion.

The streaming giant reached 130 million memberships in the three months to the end of June 2018, adding 5.2 million net customers – lower than the 6.2 million net additions it expected. The slower period arrives as Netflix prepares to face growing competition from other rivals, including Apple’s belated push into original streaming production, YouTube’s subscription offering (targeted at younger users) and Amazon Prime Video, not to mention Disney’s looming merger with Fox, which will bolster its own plans to launch a streaming service and end the House of Mouse’s long-standing relationship with Netflix. In response to fears from investors that Netflix’s growth was now slowing down, shares dropped 14 per cent following the announcement.

Nonetheless, the quarter’s growth comes at a time when Netflix has been flying high. This weekend, Netflix earned more Emmy nominations than HBO for the first time since 2017, indicating its rising profile and power in the TV landscape. Awards, though, do not necessarily translate into financial success, and when Netflix’s strength is rooted in its worldwide reach, growth is the primary way for the company to boost its revenue and the most valuable metric for its health.

In a letter to shareholders, Netflix’s CEO Reed Hastings described it as a “strong but not stellar” quarter, pointing out that while it was lower than its bullish forecasts, it was on a par with Q2 2017, when 5.2 million was also added. It also follows four quarters in a row where Netflix has consistently performed above its own growth forecasts, by as much as 2 million in Q4 2017.

670,000 subscribers were added in the US during the three months to end of June, down from Q2’s figure of 1.1 million, but consistent with the time of year from other years – the first six months of 2018 overall have seen its US net additions outperform last year. Internationally, where Netflix is expecting to find the fastest growth, 4.5 million subscribers were added, down from the previous two periods, but up 8 per cent year-on-year.

In terms of content, Netflix had one of its most diverse quarters to date, from the debut of sci-fi series Lost in Space – already renewed for Season 2 – to the return of 13 Reasons Why, Santa Clarita Diet, A Series of Unfortunate Events, Jessica Jones, GLOW and Luke Cage.

Particular successes include Boss Baby: Back in Business, its spin-off series from the animated film, which Hastings calls “one of our biggest series ever”. Its Danish thriller The Rain is also one of Netflix’s biggest non-English original shows yet, while Sacred Games is off to a “strong start” and Lust Stories, an Indian original film, has been a “major success as our largest watched original in percentage terms in any individual market in its first month”. Romantic comedies Set It Up and The Kissing Booth have also been watched by “tens of millions” of subscribers.

Netflix is also investing in technology to help fend off competition, with its new Smart Downloads feature for Android users hoping to distinguish the service from rivals such as Amazon.

“There has never been a better time to be a creator or consumer of content,” says Hastings. “We believe that consumer appetite for great content is broad and that there is room for multiple parties to have attractive offerings. We anticipate more competition from the combined AT&T/Warner Media, from the combined Fox/Disney or Fox Comcast as well as from international players like Germany’s ProSieben and Salto in France. Our strategy is to simply keep improving, as we’ve been doing every year in the past.”

Despite an underwhelming quarter, Hastings notes that earnings, margins, and revenue are all in-line with forecast and way up from prior year, with streaming revenue in Q2 up 43% year over year.

For Q3, Netflix forecasts 5 million net additions, down slightly from 5.3 million net in Q3 2017.

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