Netflix adds another feather to its cap as overseas subscriptions rise above US for the first time

Netflix adds another feather to its cap as overseas subscriptions rise above US for the first time Netflix continues to steamroll over its competitors Amazon Prime Video and YouTube by adding more subscribers to the fold in the second quarter. Will Netflix continue its rise with further subscriber growth and optimism on Wall Street? Shashank Venkat finds out

Despite apprehensions of a weak second quarter, video streaming giant Netflix has surprised everyone by adding 5.2 million subscribers in this period. According to reports, the company expected to add 3.2 million new subscriptions in the quarter but the results showed that it vastly underestimated its growth projections. More importantly, Netflix now has more foreign subscribers than in the US, justifying its global rollout in January 2016.

Netflix added an impressive 4.14 million international subscribers in the second quarter. Most of its growth outside of the US comes from Europe and Latin America, in addition to a continuing strong presence in Asia. Wall Street also gave a green signal to the subscription streaming service as its stock rose over 10 percent on the back of strong results and a projection to get its first full-year profit from international growth in 2017.

This news should calm the nerves of some investors who were increasingly worried about Netflix’s $6 billion expenditure on content alone. Contrary to investor worries, this strategy seems to have paid off. This year Netflix spent a lot of money adding shows in various languages. New local language releases such as Okja (Korean) and El Chapo (Spanish) were extremely popular among Netflix’s subscribers. Moreover, a rapidly rising strong catalogue of shows such as 13 Reasons Why and Stranger Things and the latest seasons of House of Cards and Orange is the New Black continue to attract and retain subscribers.

In the coming quarter, Netflix expects to add around 3.65 million subscribers overseas and around 750,000 in the US. Netflix will hope that its customised content will help continue to drive its growth worldwide amidst slow subscriber acquisition in the US. The streaming subscription service does hold a great advantage in terms of its content offerings which is unmatched by other rivals and traditional cable players. Moreover, Netflix has also entered into strategic partnerships with carriers internationally, the latest being with Vodafone in India, which all help to foster its growth and penetration in its international markets. With the next quarter also seeing a good line-up of new shows and seasons, expect Netflix to hit its subscriber growth targets easily.

However, in order to continue with this pace of growth and inspire investor confidence amidst some serious cash burn, Netflix will have to overcome some key challenges. The company will be watching the ongoing debate around net neutrality in the US keenly. The streaming service is likely to face some disruption if the FCC decides to roll back the current rules on net neutrality. If the FCC goes ahead with its proposed plan, Netflix will have to worry about entering into new partnerships (and spend more money) with ISPs unless it wants to alienate itself from its users. This would put some pressure on Netflix if it must raise prices to sustain these partnerships as the US is its largest and most mature market. Netflix subscribers have often not been kind on the company when it raised its subscription prices, the latest instance of which was observed in Australia.

Another challenge is to continue delivering quality shows at speed. Subscribers can be very fickle and can easily switch to other OTT players if they have more popular hit shows. For instance, a lot of Netflix subscribers (including me), regularly watch Game of Thrones over the HBO network or other partners. Netflix will have to keep delivering sticky content if it is to keep its subscribers loyal. Otherwise, Netflix’s easy subscription management system could become its bane as subscribers opt out and move to rival providers. Luckily though, Netflix seems to have done well in this department over the years and the Emmy nominations only prove their dominance over screen space.

Amidst high subscriber growth, the average viewership time on Netflix has actually decreased – from 206 minutes per month in March to 179 minutes in June. While it may be a measure of more subscribers (new subscribers may not be power users), it is also a measure of more content being consumed over mobile where a lot of apps are vying for user attention. Netflix will have to keep a close eye on this metric and ensure that it keeps its users engaged. Also, a smaller but nevertheless inconvenient problem for Netflix remains the sharing of passwords among users. At a time when investors are focused on subscription revenue, sharing of accounts does pose a problem for Netflix. If subscriber numbers show a rapid decline in the future, expect Netflix to find newer ways to plug this hole in its infrastructure.

While the current levels of subscriber growth are indeed impressive, Netflix will have to burn more cash to expand its international presence and acquire more subscribers. This negative cash flow may pay off in the long run, however Reed Hastings will have to play to Netflix’s strengths if he is to keep investor confidence high. But so long as the streaming giant continues to produce stellar shows, invest in better technology and keep users engaged, there will be no stopping the Netflix juggernaut!