Is Netflix's Lagging Subscriber Growth a Sign of More Pain to Come? | Chart

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Co-CEOs of Netflix Reed Hastings and Ted Sarandos (Photo by Kevin Dietsch/Getty Images)

Is Netflix’s Lagging Subscriber Growth a Sign of More Pain to Come? | Chart

At least one analyst says it’s no “big deal” that Netflix added just 1.54 million new subscribers in Q2

Let’s just cut to the chase: It wasn’t a great second quarter for Netflix.

The streaming giant on Tuesday announced it added 1.54 million new subscribers in the second quarter, which, on the one hand, is more than the company had projected. On the other hand, it was the smallest jump in new subscribers since at least 2013; it’s also a far cry from where the company was at this time last year, when Netflix was coming off back-to-back big quarters that helped it bring in 25 million new accounts during the first half of 2020. (Of course, that was due in large part to the COVID-19 pandemic, which forced people to stay inside and binge watch shows for days on end.)

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The rough Q2, at least in terms of subscriber growth, wasn’t ideal for Netflix. But while analysts told TheWrap the streaming giant’s lagging growth is certainly eyebrow-raising, there were also positive indicators that Netflix — which now has 209.2 million customers — is continuing to mature as a business.

First, let’s dive into Netflix’s subscriber count a bit more. One red flag that stood out: For only the second time ever, Netflix lost subscribers — 400,000 overall — in the U.S. and Canada. Considering the elements in play in Q2, though, Parks Associates Research Director Steve Nason said it was “not shocking” to see Netflix take a dip.

Nason pointed to a few factors, including how Netflix’s domestic growth was already lagging before the pandemic gave the company a jolt. And much of that is due to Netflix being a victim of its own success; the company now has about 74 million subscribers in the U.S. and Canada. In other words: There isn’t much room to grow in North America.

Nason also pointed to the lack of “tentpole shows” released during the second quarter, especially compared to the first and second quarter of last year, when Netflix was riding high off of the success of “Tiger King.” Netflix acknowledged this point in its letter to shareholders on Tuesday: “COVID-related production delays in 2020 have led to a lighter first half of 2021 slate that will build through the course of the year.” As more big-name shows come out during the second half of the year — like “Money Heist” Season 5 and “Game of Thrones” showrunners David Benioff and D.B. Weiss’ “The Chair” — Nason expects the company’s subscriber growth to jump higher.

Paul Hardart, a former Warner Bros. executive and current head of the Entertainment, Media and Technology Program at New York University, said the “low-hanging fruit is gone” for Netflix. But the service’s lack of growth is also not a “big deal,” Hardart said, especially when you consider that it’s facing increased competition from services like HBO Max, Peacock, and Disney+ now. Between more streaming services and fewer major Netflix releases, subscribers had more of a reason to ditch their Netflix subscriptions during Q2 — even if it was just for a few months.

Hardart also pointed to Netflix’s relatively low churn rate compared to its competitors as another sign Netflix will bounce back. Netflix’s low churn rate lets the company bank on consistent revenue ($25 billion in 2020) that the company can reinvest into programming — which ultimately drives subscriber growth.

“Netflix is still well-positioned” in the competitive streaming space, Hardart said. “I’m not that alarmed.”

And setting aside Netflix’s subscriber growth for a moment, the company’s report did show some positive signs from a business standpoint. Netflix’s quarterly revenue increased 19% year-over-year to $7.34 billion, coming in right around where Wall Street analysts had projected. Much of than can be attributed to an 8% increase in average revenue per user, thanks to Netflix increasing its subscription fees again late last year.

One thing analysts and investors will be watching is Netflix’s push into gaming — particularly as the streamer plans to include games as part of its monthly subscription fee, at no extra charge.

That has the potential to be a game changer, according to Brian Frons, the former head of ABC Daytime and a current professor at UCLA, because it signals an evolution in Netflix’s business approach. “Ultimately, they’re fighting for people’s attention” against not only streamers like Disney+, but also major games like “Fortnite” and “Roblox,” Frons said. By offering compelling games, Netflix could give subscribers another reason to stick around — or for more subscribers to join the fold. This will be especially important as Netflix continues to expand into gaming-focused markets like Asia, he added.

If this diversification plan makes Netflix sound more like Disney, that’s by design, Frons said. He pointed to Netflix CFO Spencer Neumann — who joined the company two years ago after stints at both Activision Blizzard and Disney — as an executive who understands it’ll take more than strong film and TV content to keep Netflix atop the streaming food chain. You need to find other ways to win viewers’ attention, Frons said, and Netflix’s push into gaming shows the company understands this reality. That will also help Netflix avoid underwhelming quarters like the one it just posted.