Netflix plans for world domination hit a speed bump

Netflix's second-quarter gain of 1.5 million international subscribers missed management's projections. Photo / AP
Netflix's second-quarter gain of 1.5 million international subscribers missed management's projections. Photo / AP

The plan by Netflix to conquer the world with its streaming video service is moving slower than expected.

Netflix shares skidded 14 percent to $85.02 in midday trade overnight , a day after reporting weaker-than-expected growth in its subscriber base.

The company said it ended the second quarter with 83 million subscribers, adding 1.7 million. That was well below Netflix's own forecast of 2.5 million additions and lower than many analyst forecasts.

Netflix said growth was hurt, especially in the United States, when it raised rates on many long-time subscribers who had been "grandfathered" in when it hiked most prices.

Analysts said Netflix is still showing growth, but not at the breakneck pace expected when the company announced it had expanded its global footprint to 190 countries, making its streaming service available in 130 new markets.

The company effectively raised its price for many customers, which provided a boost to revenue but hurt new subscriptions and may have caused some customers to turn to rivals such as Hulu or Amazon.

"These price hikes now place Netflix into a similar price category as it competitors," said Jonathan Broughton at IHS Technology in a note to clients.

Broughton said growth in new markets was disappointing, adding that Netflix may need to do more to connect with viewers around the world.

"Netflix has been slow to invest in international content, even in larger countries, and this has stalled growth," he said.

Local content has been cited as key to expansion in international markets and pulling back from this may be detrimental to the company outlook outside the US and UK.

Netflix has been slow to invest in international content, even in larger countries, and this has stalled growth.
Jonathan Broughton at IHS Technology

Daniel Salmon at BMO Capital Markets said Netflix faces "a period of challenging visibility" as it seeks to expand globally.

"While Netflix notes that local language content 'constitutes a small minority of viewing' we believe it has a higher likelihood than traditional, Western/Hollywood content to generate the positive word-of-mouth/local news coverage that could accelerate subscriber growth in a given country," Salmon said in a research note.

Michael Graham at Canaccord Genuity said Netflix may be seeing only a temporary pause in its growth spurt, and views the drop in Netflix as "a good long-term buying opportunity.

Graham said that he believes "that the full benefits from Netflix's international launch and content investments have yet to be realised."

Neil Saunders of the research firm Conlumino, said the troubling news from Netflix is in the United States, where it raised most subscribers to $10 per month from $8 after a period of "grandfathering."

"Inevitably, this change brought with it a great deal of churn, with some subscribers cancelling memberships," he said.

"As much as Netflix's growing international business affords it future potential, at present that division is loss-making. The US delivers the profits and that means slower domestic growth will put a brake on bottom line expansion."

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