Netflix admits new competition is having an impact in letter to shareholders
Netflix added 8.8 million subscribers in the fourth quarter, more than it expected about three months ago. But its net additions in the USA, 420,000, came in below its outlook.
In the company's fourth-quarter letter to shareholders, management was candid. New competitors such as Disney Plus and Apple TV Plus are having an impact. "Our low membership growth in [the U.S. and Canada] is probably due to our recent price changes and to U.S. competitive launches."
The company noted "slightly elevated churn levels" in the USA and expects that to continue into the first quarter – the first full quarters for Disney Plus and Apple TV Plus. The European rollout of Disney Plus in late March could affect Netflix in the second quarter. AT&T's HBO Max will launch in May and Comcast's Peacock will roll out in April before launching broadly in July, so competition could affect Netflix's results in each of the next three quarters.
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What's behind Netflix's outlook
Management expects first-quarter net additions of 7 million, below the Street's consensus estimate of 8.5 million and less than the 9.6 million subscribers the company added in the first quarter last year.
Aside from competition, Netflix said it's still working through the price increases it announced early last year. A more even content slate between the first and second quarters ought to produce comparatively stable growth throughout the first half of the year. (Last year's content slate heavily favored the first quarter.)
That said, there's reason to believe the impact of Disney Plus will be more muted in the first quarter. The new streaming service had an unprecedented first two months, but investors should expect growth to slow this quarter. Disney Plus had very high brand awareness before its launch, and its product is easily understood – access to Disney's most well-known franchises. Naturally, many subscribers signed up quickly.
Without another major series launch like "The Mandalorian," Disney should see more muted subscriber growth in the first quarter, and the service won't expand into European markets until the end of March.
The most important metric is improving
Last fall, Netflix CEO Reed Hastings said time is the most important metric to watch in the so-called streaming wars. In its most recent shareholder letter, Netflix provided lots of engagement data around new titles. Most importantly, it said, "our viewing per membership grew both globally and in the U.S. on a year over year basis, consistent with recent quarters."
"And that's because our content is getting better. Our service is getting better," Hastings said during the company's fourth-quarter earnings call.
He and the rest of management focused on the migration of time spent from linear television to streaming. "It primarily is going to take away from linear TV and takes away a little bit from us," CFO Spencer Neumann said of Disney Plus. "That's all coming out of linear TV," Hastings said of Netflix's engagement growth.
Growing the amount of time spent per member in the face of streaming competition will be a good indicator of the long-term health of Netflix. Churn might increase, gross additions might slump during quarters when big services launch, and net additions would disappoint as a result, but strong engagement should indicate more subscribers will come back or find their way to Netflix eventually. It also leaves the door open for another price increase if subscribers find the service increasingly valuable.
Adam Levy owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.
The Motley Fool is a Paste BN content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of Paste BN.
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