• What’s Ahead For Netflix After Gaining Nearly 16 Million Subscribers in Q1 ’20?

    Netflix demonstrated what a huge beneficiary of shelter-in-place the company has become, reporting 15.8 million net subscriber additions globally for Q1 ’20. The number was over twice as large as the 7 million that Netflix had forecast for its Q1 gain back in January. Netflix was well ahead of forecast in all 4 of its geographic regions and now has 183 million global subscribers, cementing its position as the largest SVOD service by far.

    The region that is most intriguing to me is the U.S. plus Canada region (“UCAN”), where, back in January, I thought there was a 50-50 chance Netflix could actually lose subscribers in Q1, for the first time. That was based on Netflix’s global forecast and looking at recent growth trends in the other 3 regions. Instead, Netflix added 2.31 million subscribers in Q1 ’20, up from 1.88 million in Q1 ’19.

    As I wrote last week, using data from Antenna, it appeared that Netflix’s churn rate fell in the past couple of months, compared to an increase last year during the period, and that subscriber gains were higher than normal. Netflix corroborated the latter in its shareholder letter yesterday, noting that “membership growth has temporarily accelerated due to home confinement” and that “…starting in March, many more households joined Netflix to enjoy entertainment.” It also said “some of the lockdown growth will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted.”

    So looking ahead, the question becomes how many of these subscribers will remain as the shelter-in-place guidelines ease, and what impact does all of this have on future quarters’ growth rates? Netflix said as home confinement ends, “we expect viewing and growth to decline.”

    It offered Q2 guidance of 7.5 million global subscriber additions, which is nearly triple the 2.7 million it added in Q2 ’19 (which also included a 130K subscriber loss in UCAN). No doubt April is already pacing well above a year ago. But Netflix conceded that the forecast is “mostly guesswork” and depended on many factors. It also noted that looking further out into the year subscriber additions will likely lag because of pull forward of subscribers.

    Still, the longer shelter-in-place continues, the stronger Netflix is likely to become. One benefit is that churn rates are likely to be lower than typical for new subscribers because shelter-in-place creates more time for them to experience Netflix’s broad content catalog. As the pandemic continues and live sports are preempted, viewers will continue to turn toward entertainment (it may even become more important as fatigue sets in about following the news as closely as viewers have). Netflix also benefits within the broader SVOD category because it has the highest name recognition and many distribution partnerships internationally.

    The virus has changed so many of our daily routines and expectations. Netflix’s business was on a relatively well-defined trajectory coming into 2020 that has also been upended, but in a way that has brought a surge of growth and increased competitive advantage.

     
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