Netflix has hit a wall in the US, but its global outlook is much rosier

A tale of two battles.
A tale of two battles.
Image: Netflix
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Netflix is increasingly a story of two different companies: One whose growth has hit a wall in the United States amid more streaming competition, and another that continues to dominate the global market.

The advent of new streaming services like Disney+ is contributing to Netflix’s slow growth in the US, the company admitted today in its earnings report for the fourth quarter of 2019. ”Our low membership growth in UCAN [United States and Canada] is probably due to our recent price changes and to US competitive launches,” Netflix said in a letter to shareholders (pdf). The company increased the cost of most subscriptions by $2 per month in May.

Netflix added just 420,000 paid subscribers in the US last quarter, down from 1.53 million from the same period a year ago. That was also fewer than the 600,000 the company forecast. The service now has just over 61 million subscribers in the country.

Netflix shares were down about 2% in after-hours treading.

The anemic US growth is likely to continue—or perhaps worsen—as more major players compete for eyeballs. NBCUniversal’s streaming service, Peacock, which for now is aimed solely at the United States, debuts in April. A month later, WarnerMedia will launch HBO Max .

But the news was much better for Netflix outside the US.

The streaming service added 8.8 million subscribers worldwide, easily beating its own projections of 7.6 million. Netflix now boasts more than 167 million paid members around the world—106 million of which live outside America. The service has been available in every country except China since 2016. Increased levels of broadband internet penetration in developing countries has aided the company’s quest for world streaming domination (as has more investment in local productions worldwide).

It was the company’s second-best quarter for global subscription growth ever, which it attributed to an unusually impressive content slate. The fantasy series The Witcher, launched in December, “is tracking to be our biggest season one TV series ever,” Netflix bragged. The streaming service also bested every other Hollywood studio with 24 Oscar nominations this year, thanks to films like The Irishman and Marriage Story. All Netflix original films and TV series are released to every subscriber around the world at the same time.

Netflix’s head start in the streaming market has strengthened its global position. Disney is arguably the only other company with streaming ambitions as global as Netflix’s. Disney+ will launch in Western Europe on March 24, before slowly trickling into other continents in subsequent years. The Mouse House projects between 60 and 90 million subscribers worldwide for its service by 2024. Even if it hits the top end of that goal, that would still fall well short of Netflix’s global membership.

The untapped international potential has some analysts bullish on Netflix longterm, even as its US growth has nearly ground to a halt. While its stock was down 4% overall last year, it has rebounded about 17% since since Disney+ debuted, demonstrating that investors still have confidence despite the formidable new entrant.

There are signs, however, that the rapid global growth is hindered by Netflix’s struggles in the US. The company is only projecting 7 million global subscriber additions in the first quarter of 2020, down from its record 9.6 million from the same quarter last year. In its letter to shareholders, Netflix blamed the lukewarm forecast on “slightly elevated churn levels” in the US.

Also worrying investors is the outstanding question of Netflix’s negative free cash flow, which was -$1.5 billion for the quarter (vs. -$1.2 billion for the same period last year) as it continues to spend huge sums of money on content each year. (Analysts expect Netflix will drop $17 billion on content this year, up from $15 billion in 2019.) The company insists that it will improve free cash flow with the goal of being free cash flow positive at some point in the next few years, but it’s getting to the point where investors may want to see actual evidence.