Netflix Inc is approaching a litmus test of its sustainability. The company said on Wednesday in its third-quarter earnings release that it would add fewer net new streaming video customers this year than in 2018.
Paid subscriber growth fell short of Netflix’s forecast for the second consecutive quarter. The company is still adding customers at a healthy clip, to be sure, but Netflix is predicated on adding streaming video customers essentially to infinity.
The company said it misjudged how many people would cancel when it raised prices in the US and some other countries, and it said alternative Netflix-like services would hurt, at least on the margins.
The company also said it was having a harder time predicting the number of new subscribers in the next few months because of an abundance of untested movies or series that will hit its service soon.
None of this is great news for a company that has declared itself immune to external forces like competition, the supply-and-demand swings of price increases and the typical wax-and-wane of hit-driven entertainment companies.
Surprisingly, Netflix shares surged in after-market trading on this news. The company’s stock price had fallen about 20% after the disclosure in July that it lost US customers in the second quarter, something that had not happened for years.
Since that earnings flop, optimism about Netflix has been laced with a ribbon of fear.
Many investors and entertainment industry watchers are eager to see whether new streaming video services that will start to debut late this year from Apple Inc, Walt Disney Co. and AT&T Inc’s HBO will eat into Netflix’s customer growth.
On Wednesday, Netflix both provided cherry-picked evidence that competing services don’t clip its wings and acknowledged that competition is hurting. It’s a typical head-scratcher from a management team that sounds overconfident at times.
Netflix has always said that no single company will take all the spoils in streaming video, and it’s right. Paradoxically, a growing tangle of online entertainment options may make Netflix’s simplicity more appealing.
Still, Netflix needs to keep expanding its subscriber numbers – particularly in the US, because that’s where its economics work the best.
If Netflix’s fourth-quarter forecast pans out, the company’s US paid customer numbers are growing at 1% or less each quarter from the prior period, down from a quarter-to-quarter growth rate of 2% to 4% in the last few years.
This is hardly doomsday. It’s also not good for a company at which minor slowdowns in growth can make a drastic difference in profit potential.
I’m also looking at another test of Netflix’s viability that’s more important than the myopic focus on a “war” between Netflix and a tiny number of mostly US-focused streaming options. That test is whether Netflix can stop lighting so much cash on fire.
The company in the last 12 months has spent $13.6 billion in cash on programming and burned through $2.9 billion more cash than it took in from subscription fees and other revenue. This upside-down financial status has persisted for about five years.
To me, this cash-burning status — not competition from other streaming companies, not fickle taste in consumer entertainment or the newfound reluctance of many entertainment companies to stock Netflix with programming — is the company’s biggest Achilles’ heel and evidence of the cost of Netflix’s ambitions.
This condition is no secret, but even the typical financial worrywarts have been unperturbed that Netflix is perpetually spending other people’s money to cement itself as a default entertainment option for billions of people.
Netflix reiterated on Wednesday that 2019 would be a peak year of spending more cash than it takes in. Conditions will improve a little next year and then some more after that, Netflix said.
The company doesn’t say when it can stop borrowing money to fund itself, but some analysts have estimated the tide will turn in 2021 or 2022. If growth continues to slow, however, that tipping point of self-sustainability pushes further out.
Netflix’s torrent of spending and borrowing to pay for more programming and continued growth get harder if the sign-up rate slows even a touch. Netflix has always been a matter of faith: Either you believe it will be a lasting, economically flush staple of global entertainment or you don’t.
The slowing customer growth shows that more than a decade after Netflix started to lead a revolution in home entertainment, a simple question remains unanswered: Will even the winners in streaming video be alive at the end?