Netflix lost 126,000 US subscribers in Q2: Aberration or warning signs?

Netflix lost 126,000 US subscribers in Q2: Aberration or warning signs? Netflix’s second quarter earnings have highlighted some chinks in the armour of the undisputed king of the SVOD space. So, what do the disappointing Q2 results mean for Netflix?

Subscription giant Netflix recently reported its second quarter earnings and the results have been painful for its shareholders. The video streaming giant lost subscribers in the US for the first time since it started the service, with as many as 126,000 people unsubscribing in Q2. Not surprisingly, the Netflix stock price fell by as much as 12.4% following the announcement.

There are a few reasons being cited for Netflix’s disappointing performance in the quarter. Subscribers undoubtedly felt the pinch on their pockets after Netflix raised subscription prices by up to 18% earlier this year. The SVOD platform also acknowledged that its content slate in Q2 drove less growth than anticipated. According to The Motley Fool, some drop in numbers can also be attributed to a larger-than-expected pull-forward effect in Q1 as the company easily beat the member growth expectations in the previous quarter.

While weakness in the US markets was the major headline from the earnings release, Netflix also failed to match up to investor expectations on new subscriber additions worldwide. The company added 2.7 million new members in the second quarter, much less than the anticipated 5 million paid subscriber additions. This was lower than expected across all its regions, despite Netflix taking significant steps to ramp up region-specific content.

The second quarter has been Netflix’s Achilles Heel for some time, with the company having fallen short of expectations last year too. However, it is the magnitude of shock – the loss of subscribers combined with the slow member growth – which has forced many people to take notice.

Just a blip or a sign of things to come?

Subscriber churn is a constant battle for any business which follows the subscription model – be it a giant like Netflix or a new startup. For SVOD companies especially, it can be quite tricky to maintain a good content catalogue at attractive subscription prices. From that perspective, Netflix’s current position will not worry the company or its shareholders since thy have been through such blips before and emerged stronger. Netflix will hope that the return of popular shows such as Stranger Things, The Crown and Orange is the New Black in the coming quarters will bring many subscribers back to its fold. The company has estimated that it will add 7 million new subscribers next quarter.

While Netflix has discounted the role that competition played in its Q2 decline, it is going to pose a significant challenge for the company in the coming months. The biggest threat, of course, is Disney’s upcoming streaming service Disney+ which is priced at an attractive $6.99 per month. With its pricing nearly 50% cheaper than Netflix, Disney may well tease away many subscribers to its platform. In addition, other upcoming SVOD services from Apple, NBC Universal and AT&T's WarnerMedia are also looming large.

Apart from increasing competition in the marketplace and the resulting subscription fatigue, these new streaming services will take a lot of the existing content away from Netflix. The platform will not be able to show the popular sitcom Friends on its service in the US from next year, losing the rights to AT&T. Netflix has also lost The Office to NBC Universal, and Disney has already started to pull the plug on its franchise films from Netflix.

The road ahead for Netflix

The good news for Netflix is that the platform remains the most popular streaming platform around the world with 151 million subscribers. Despite losing some licensed content, Netflix’s continued push for originals should keep it ahead of the competition providing the content quality continues to be on point. In addition, Netflix’s focus on emerging markets such as India will help offset the inertia that has seeped into some of its more saturated markets. Netflix has already announced plans to launch a cheaper, mobile-only plan in India.

Aside from the content, two things remain central to Netflix’s lead – technology and subscription experience. For any new SVOD service to compete with Netflix, they will have to effectively match up to Netflix’s obsession with technology – be it in-flight streaming technology or constant tweaks to the user experience. And of course, the company is a pioneer in digital subscriptions and seamless subscription billing, so much so that the ‘Netflix model’ has become synonymous with ‘subscription model’.

According to a Deloitte study, a typical US subscriber has access to three services at any given time. There is a good chance that Netflix will continue to be among these services even in the face of increasing competition. The onus, of course, will be on Netflix to continue delivering the quality content which it has done so far. The more difficult task will be to do it at a price which remains attractive enough for subscribers and its shareholders. Can Reed Hastings and co. find the right balance?
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