The reaction to Netflix’s latest quarter announcements has been odd. Headlines range from “Netflix beats” to “Netflix misses” and everywhere in between. But, I guess this is what you should expect in today’s world where nobody really does any research.
The bottom line is that Netflix is incredibly dominant, and this quarter just further cements this opinion. Netflix is transitioning to reporting only net paid subscriber additions (how many new paying subscribers there are) versus reporting on total subscriber additions (paid + free trial subscribers). I believe this transition is creating confusion which is why some are missing just how good this quarter was. The bottom line is that Netflix guided 7.6 million new paid subscribers for the quarter, and the company delivered 8.8 million.
The company is forecasting another 8.9 million new paid subscribers for the first quarter of 2019.
My favorite chart that Netflix has been publishing on their investor relations documents is this:
This chart shows you how Netflix is essentially growing faster each year. Not only that, but the rate of growth is accelerating. Notice how the gap is widening for each year interval. The gap between 2018 and 2017 was the widest amongst the year differentials. Subscriber growth is indeed accelerating.
Will 2019 continue to accelerate? We’ll see, but I have strong reason to believe that it can. Netflix hasn’t even begun to reap the benefits from the major talent acquisitions they’ve made in recent years such as Shonda Rhymes and Ryan Murphy. There is so much in the pipeline that’s difficult to fathom the volume of content still coming. And this is only going to continue. Netflix is not letting up.
As the chart shows, Netflix added over 28 million new paid subscribers in 2018. In 2017, they added approximately 22 million. In 2016, just over 18 million. In 2015, just over 16 million. We can reasonably estimate that Netflix will add somewhere between 30 and 40 million new subscribers in 2019. This would put Netflix at around 170 to 180 million paid subscribers by the end of the year.
Another way to look at this is that Netflix is going to have about 175 million paid subscribers when Disney+ launches. Disney+ is starting from zero, while Netflix has 175 million people essentially contributing $8-15 per month into Netflix’s coffers to fuel more growth. Disney obviously has resources and will have a great platform, but let me be clear… Netflix has already won.
Netflix has already won for three reasons: the massive head start, the dedicated pursuit of growth and dominance in this market and the unshackled, singular focus of the company. Let’s briefly address each one.
- The massive head start – As stated, when Disney+ launches, Netflix will have 175 million subscribers contributing cash each month to Netflix to fuel additional growth. Disney has resources, yes. Tons of them. And they’ll invest heavily. But at the time Disney+ launches, Netflix will essentially have $1.75 billion in monthly revenue from existing users that they can use to continue to plow into growth (and they will). Disney will likely get a batch of early adopters / Disney enthusiasts to sign up immediately. Let’s estimate 5 to 10 million. Then, their growth process will begin. How many paid subscribers will Disney+ have at the end of 2020? 10 million? 15 million? 20 million as a best case scenario? Disney+ will likely take at least ten years to get to the number of subscribers that Netflix will have when Disney+ launches.
- The dedicated pursuit of growth and dominance – Netflix just raised prices on US consumers, yet didn’t adjust its negative free cash flow projection. What’s this mean? They’re using the price increase to continue to fuel new content and growth. Netflix is going all out on long-term dominance in what I believe is a winner-take-most global market. The profitability opportunity ten years from now is so massive, that nothing else matters. Netflix understands this. All out pursuit of long-term dominance. Fueled by the largest paid subscriber base in the world.
- Unshackled, singular focus – Netflix has no legacy businesses that they care about. They have the DVD mailing business, yes. But it gets literally no attention from the executives. Disney (and other media companies) meanwhile are trying to maintain legacy cash flows while transitioning to the future. It’s not bad business, it’s just reality. Netflix, meanwhile, is singularly focused. Every decision is being made in light of long-term dominance in streaming. Disney is making decisions to maximize short term profits of their cable unit, their parks, and yes, transition to streaming. Disney is a fabulous company, but when it comes to streaming and streaming alone, Netflix has a major advantage.
Game over. Sit back and enjoy the ride. It’s going to be lucrative.