Netflix’s video streaming service suffered a dramatic slowdown in growth during its traditionally sluggish spring season, a drop-off coming as the company girds for even stiffer competition.
The service picked up 2.7 million worldwide subscribers for the April-June period. That’s far below Netflix’s forecast of 5 million subscribers. The second-quarter letdown announced Wednesday — including a decline in U.S. subscribers that surprised many Wall Street analysts and sent Netflix shares falling 12% — comes after Netflix attracted nearly 10 million subscribers during the first three months of the year, more than any other quarter since the debut of its video streaming service 12 years ago.
Netflix ended June with 151.6 million worldwide subscribers, far more than a current crop of video streaming rivals that includes as Amazon and Hulu.
Signaling it expects to regain some momentum this summer, the company projected it will add 7 million subscribers from July through September. The optimism stems in part from the immense popularity of “Stranger Things,” whose third season attracted record viewership after its July 4 release.
But the battle for viewers’ attention and dollars will get tougher this fall when Walt Disney Co. and Apple plan to launch their own streaming channels. AT&T will also join the fray next year with HBO Max and NBC is expanding into video streaming, too.
“The competition for winning consumers’ relaxation time is fierce for all companies and great for consumers,” Netflix said in a letter to shareholders.
Netflix traced the second-quarter’s slow subscriber growth primarily to a recent round of prices increase, including hikes of 13% to 18% in its biggest market, in the U.S. That pushed the price of its most popular U.S. plan to $13 per month, testing the bounds of how much some consumers are willing to pay for a service that started out at $8 per month for the same level of service.
Some U.S. households decided Netflix is no longer worth it at the higher price, causing the company to end June with 120,000 fewer subscribers in the country than it had at the end of March. Netflix offset the U.S. setback with gains in some of the nearly 200 other countries where it sells its streaming service.
The increasingly crowded field vying for viewers’ attention and money has led to questions about whether Netflix will be able to maintain the rapid rate of subscriber growth that has made its stock as one of Wall Street’s premier performers during the past decade.
A $10,000 investment in Netflix at the end of 2009 would have been worth $460,000 at the end of Wednesday’s regular trading session.
But in a sign of how quickly some of those gains can evaporate if Netflix starts to struggle for subscribers, the company’s stock plunged by more than 12% in Wednesday’s extended trading to $317.
Netflix also needs more customers to help cover the costs of all the exclusive TV series and movies that it keeps adding to its line-up to stand out for the rest of the crowd. The Los Gatos, California, company so far has been borrowing heavily to finance a highly acclaimed slate of programming that garnered 117 Emmy nominations, second only to HBO’s 137 nominations a mong all networks.
Selling ads would help Netflix bring in more revenue, but the company’s management on Wednesday reiterated the service will continue to remain commercial free.
For now, Netflix is still burning through more cash than it is bringing in. In the second quarter, it registered a negative cash flow of $594 million and expects to accumulate a negative cash flow of $3.5 billion for the entire year.
Part of that outgoing money will go toward the development of more original shows to replace some of the programming that it has been licensing from Disney, AT&T and NBC, all of which are reclaiming the rights for their own streaming services. The losses include “Friends” and “The Office,” long-defunct series that still remain among the most-watched shows on Netflix.
But Netflix still posts profits, due to the way entertainment companies are allowed to account for their programming costs. In the most recent quarter, Netflix earned nearly $271 million, a 30% drop from the same time last year. Revenue climbed 26% from last year to $4.9 billion.