A confluence of negative factors slammed Netflix in the past quarter, resulting in subscriber numbers and other metrics exposing Netflix's vulnerabilities - and leaving the streaming giant's stock plunging in after-hours trading.
Netflix Subscribers Wave Goodbye
While earnings-per-share came in at $0.60, four cents above expectations, and revenue was only $10 million short of expectations at $4.92 billion, the subscriber numbers were of grave concern.
Domestic paid subscribers actually fell by 126,000, while the expectation was for an increase of 352,000. That's a miss by almost half a million subscribers.
Yet Netflix management doesn't really have a good excuse for this decline, and is using some smoke and mirrors to downplay it.
On the one hand, management said there wasn't any material change to the competitive landscape. On the other, Netflix claims the number of subscribers added in the first quarter was so large that there may have been “more pull-forward effect” than it realized.
That may explain why there weren't any subscriber additions, but it doesn't explain the 126,000 subscribers that canceled the service. It’s the first quarter-to-quarter decline in years.
And yet, management claimed that domestic subscriptions were "essentially flat." That's the smoke and mirrors.
Why Cancel Netflix? Try Price Hikes and Lousy Content
After so many quarters and years of subscriber addition, why would Netflix subscriber suddenly decline?
The first obvious reason is that Netflix instituted a price hike over the past quarter. It seems possible that, given this price hike came so rapidly after the last one, that Netflix subscribers see the writing on the wall.
It suggests that Netflix will need to continue raising prices, and with one look at the $3.5 billion dollar cash burn it expects this year, we can understand why. Nor will advertising help Netflix.
There's also a problem with content. There's too much of it, and the quality is declining.
While Netflix still has many terrific shows, when you start scanning through its offerings, you can tell the quality of the content is faltering.
...And Here Comes the Competition
My guess is that this is the beginning of subscriber cancellations that will affect Netflix most of the quarters going forward. So do the experts.
That's because more and more streaming services are coming online, and Disney will be launching its streaming platform later this year.
Households are going to limit the number of streaming subscriptions they each have.
Most will have a premium cable streaming service such as HBO or Showtime, supplemented with one other service such as Netflix or Amazon, and households that have children and teenagers will subscribe to Disney as a possible third option.
Brewing Problems for Netflix Internationally
International subscriptions are continuing to grow at a very nice clip. However, the increasing costs of production and marketing are still dragging on this segment; international subscriptions accounted for about $700 million in contribution profit, less than half that of the domestic segment.
Netflix is also going to face a long-term problem with international subscribers. For starters, the company will never get into China.
China has its own market for its own content, and the amount of effort necessary for all of Netflix's content to pass through the Chinese censorship bureaus are too much for the Chinese to contemplate.
The other problem is cultural. American content will only go so far. Over the long term, Netflix is going to struggle to keep international subscribers because they cannot produce content specific to every region.
Meanwhile, Netflix stock trades at 140 times trailing 12-month earnings. Its valuation remains absurd, even after today’s 12% haircut, and its stock chart is terrifying.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.