In its 3Q 2017 results, Netflix announced that it had another 4.45 million international customers abroad and 850,000 in the U.S. beating analysts’ estimates by about 1 million subscribers overall.
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The company issued forecast for 4Q 2017 subscriber growth of 5.05 million international customers abroad and 1.25 million in the U.S.. This is expected to be buoyed by new original content from the U.S. and local markets ranging from Italy, Germany and Japan, which it hopes will continue driving international growth.
As it chases continued subscriber growth, Netflix faces two main challenges. Firstly, it must weather subscriber churn from its price increases. Facing increasing pressure from shareholders to improve operating cashflow, Netflix recently raised its monthly prices in the U.S. and U.K. as well as other selected international markets – 4Q 2017 will be a new test of whether the company’s investment in more original content will keep subscribers on their streaming platform.
The second challenge is that the company is burning through cash to pay for this original content. With a programming spend at US$6 billion for this financial year, it is likely to reach US$8 billion next year (with at least 25% being on spent on original content) as it seeks to fend off growing competition from the likes of Amazon, Hulu (which has recently reduced prices) and HBO as well as traditional media companies such as Disney, which recently announced that it would start its own streaming service and not renew its content licensing agreements with Netflix.
Netflix has acknowledged this challenge stating:
“Investors often ask us about continued access to content from diversified media companies … While we have multi-year deals in place preventing any sudden reduction in content licensing, the long-term trends are clear. Our future largely lies in exclusive original content …”
Therein lies the core opportunity and challenge – original content will be key factor in creating a sustainable, long-term subscriber base but keeping it fresh and exciting requires significant capital investment. At its current spending rate, Netflix is unlikely to have positive operating cashflow until beyond 2020. However, if it can continue growing its subscriber base, it is likely that the market will continue supporting the company.