David Farnor | On 16, Oct 2014

Netflix’s rapid growth has showed its first signs of slowing down, as the company’s recent price rise hits customers.

The streaming service has enjoyed quick expansion in the past year, as it enters new territories and continues to release original content. In the third quarter of 2014, though, Netflix “about a million” new members in the US, lower than the 1.3 million their forecast.

Outside of the US, too, 2 million members were added to the roster (taking their international total to 15.84 million), taking its total growth to 3 million, below the 3.7 million expected.

That growth was driven by the launch of Netflix in France, Germany, Austria, Switzerland, Belgium and Luxembourg, adding about 66 million broadband households to the company’s addressable market.

In recent days, the Netflix app has gone live on set-top boxes from SFR in France and Deutsche Telekom in Germany, and deployments this quarter are expected from Orange and Bouygues in France, and Belgacom in Belgium.

While this expansion continues to be the company’s biggest cost, it is also Netflix’s best strongest chance of sustainable profitability. Indeed, the company says that previous markets entered in recent years – Canada, four years ago, and Netherlands, one year ago – are now “collectively profitable on a contribution basis”. Further international expansion is planned in 2015, with nine Netflix original series in production around the world, as its content slate becomes increasingly varied to suits its target audiences.

So, why the slowdown?

CEO Reed Hastings said in a letter to investors that the price growth, “as best we can tell”, is responsible: “Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.”

He went on to attribute the earlier positive growth in 2014 following the price hike to the popularity of Orange Is the New Black Season 2, which offset any negativity of the increasing fees.

As result, the company’s stock price plunged on Wednesday by more than 25 per cent.

Hastings focused instead on domestic streaming revenue of $877 million, in-line with their forecast, which grew 25 per cent year-on-year.

“Since our per-member viewing and retention in the US are as strong as ever, we don’t think increased competition from piracy, TV Everywhere, Amazon Prime Instant Video, Hulu, etc, is a major factor,” he added.

Indeed, Netflix is as confident as ever, announcing a wave of ambitious new deals for the coming years. They include a plan to release a Crouching Tiger, Hidden Dragon sequel exclusively on Netflix and in IMAX cinemas next year, as well as produce four new Adam Sandler comedies.

“We are investing in original films because doing so can be favorable economically compared to current Pay TV deals,” said Hastings, “and is consistent with the desires of the global on-demand generation to enjoy new movies without having to wait for months after they debut in US.”

He also noted the role Netflix has in bringing TV shows such as Gotham and – in some European territories, Fargo and Penny Dreadful – to subscribers: “These deals ensure our international members access to hit US television series without
having to wait the months or years imposed by traditional TV models and should help to reduce piracy in those markets.”

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