Netflix appears to be unfazed by the upcoming arrival of streaming services such as Disney+, Apple TV+, and HBO Max, expecting “modest headwind” to near-term growth at most. While it acknowledged that the new competitors have “some great titles” (especially catalog titles), it said in a letter to shareholders that “none have the variety, diversity and quality of new original programming that [it is] producing around the world”.
It is also conscious of the fact that there is a very large market opportunity, with Netflix taking up less than 10% of television screen time in the US, its most mature market, and much less than that in mobile screen time. While Netflix has competed with streamers such as Amazon, YouTube, and Hulu for over a decade, it said it is still small compared to linear TV.
However, Netflix expects the launch of the new services to accelerate the shift from linear TV to on demand consumption of entertainment. Over the next 10 years, streaming services will grow viewing and even replace linear TV, it said.
While the launch of the new services will be “noisy”, Netflix does not think the competition will result the players in the market to cannibalise one another. The company explained: “For example, for the first few decades of cable, networks like TBS, USA, ESPN, MTV and Discovery didn’t take much audience share from each other, but instead, they collectively took audience share from broadcast viewing”. It added that streaming video services also have mostly exclusive content libraries that make them highly differentiated from one another.
We’ve been preparing for this new wave of competition for a long time.
Netflix has started investing in originals in 2012 and expanded aggressively ever since – across programming categories and countries with an ambition to “share stories from the world to the world”.
Original content is working in the form of member viewing and engagement, according to the streaming giant. English-scripted TV series, which was started more than six years ago, has seen great success in the third quarter of 2019. This include Stranger Things season three, the most watched season to date with 64 million member households in its first four weeks; and limited series Unbelievable, one of its most highly-viewed dramas with 32 million member households in its first 28 days.
It has also been expanding its non-English language original offerings to grow its penetration in international markets. In the third quarter, the season three of La Casa de Papel (or Money Heist) is themost watched show on Netflix across its non-English language territories with 44 million households watching the new season in the first four weeks of release. Other performing titles include Brazilian original Sintonia, Japanese title The Naked Director, and the second season of Sacred Games, which is the most watched show in India.
To date, Netflix has globally released 100 seasons of local language, original scripted series from 17 countries and have plans for over 130 more in 2020. It plans to expand our investment in local language original films and unscripted series moving forward. Meanwhile, it also continues to test mobile-only plans in various markets and expand its partner-based bundle offerings. It told shareholders in the letter:
Amazing content can be expensive. We don’t shy away from taking bold swings if we think the business impact will also be amazing.
“We don’t close every deal we chase and we don’t chase every deal on the table. And while not all projects that we do pursue will work out, our large and growing subscription base helps enable us to try many approaches,” it added. The size of its content budget (approximately US$10 billion on profit and loss spend and US$15 billion in cash content spend in 2019) insulates us from dependency on any single title.
Q3 performance and future outlook
In Q3, Netflix reported US$5.2 billion in revenue, an increase of 31% over the prior year. Operating income doubled to US$1.0 billion. Average streaming paid memberships and average revenue per user (ARPU) grew 22% and 9% year over year, respectively. Operating margin of 18.7% (up 670 basis points year over year) was above its guidance due to timing of content and marketing spend.
“We’re making strides in our key markets and, while we have much more work to do in Asia in the coming years, we are seeing encouraging signs of progress,” said the company. For Q4, it is expecting consolidated revenue to increase 30% year over year with 9% streaming ARPU growth. Netflix said it is on track to achieve its full year 2019 operating margin goal of 13%. In 2020, it is targeting another 300 basis points in operating margin expansion, consistent with the annual margin improvement it has delivered each year since 2017.
Meanwhile the company said total viewing measured by various third parties is the “best indicator” of its relative success as it is a signal of customer satisfaction, and few of the services will disclose streaming video revenue. Subscriber figures are hard to interpret due to bundles, discounts and other promotions, it explained.
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