Netflix reported solid Q1 results yesterday, gaining 2 million streaming subscribers in the U.S. and another 1 million internationally. Netflix now has 27.9 paying subscribers in the U.S. and 6.33 paying subscribers internationally. With growth re-started since the 2011 Qwikster debacle, a persistent question is how big can Netflix become in the U.S.?
Traditionally many have thought the answer is in the 30 million subscriber range, which is where the biggest premium channel, HBO, has pretty much leveled out. This line of thinking assumes that Netflix is essentially another premium channel and consumers will treat it as such.
But Netflix's CEO Reed Hastings always answers the size question by asserting that Netflix can grow to become 2-3 times HBO's size, implying 60-90 million subscribers ultimately. He points to differentiators like Netflix having more content, being less expensive and available on more devices, having greater personalization, etc.
All of this is true, yet as I pointed out yesterday, to the extent that Netflix is a supplement to existing pay-TV service and not a replacement (on its own or in combination with other services like Aereo, Hulu Plus, etc.), consumers still must decide whether they value and can afford an additional video service, whether from Netflix, Hulu Plus, Amazon or another. The evidence, at least from Nielsen, is that lower and middle income Americans currently under-index for adopting Netflix, which isn't any big surprise.
That means that for Netflix to add another 30-60 million subscribers, as it projects, it either has to convince many of these homes to spend another $8/mo and/or there has to be material cord-cutting or cord-nevering to occur in order to avoid the issue entirely. The first scenario is essentially what premium networks have been trying to do for years, and obviously given HBO subscribers have been relatively flat, the challenge is steep.
The latter is the more interesting scenario, and one that could be part of a broader disruption of the pay-TV landscape. It's extremely hard for me to believe Netflix will get to 60 million subscribers without there being noticeable decline in pay-TV homes (for example 10 million of Netflix's next 30 million subscribers NOT subscribing to pay-TV, which would represent an approximately 10% level of cord-cutting). This would be a big change from today's landscape where pay-TV operators still insist there's minimal cord-cutting.
I've said for a long-time that as OTT content choices from Netflix and others improve, the most vulnerable pay-TV homes are "entertainment-onlys" that don't value live sports, as well as those that are economically-challenged. One new twist is the advent of Aereo, which could deliver linear broadcast channels as an augment to Netflix. For the entertainment-only or economically-challenged household, it would cost less than $20 for a pretty compelling package, plus ISP charges.
This is the scenario that should be most closely watched by pay-TV executives, and why the stakes around Aereo extend well beyond disrupting broadcasters' retransmission consent fee revenue stream. How the next year or two unfolds for Netflix will say a lot about the durability of pay-TV's value proposition.