Netflix's Total Subscriber Growth Exceeds Estimate as Costs and Competition Continue to Grow

More Streaming Customers Overall, But Fewer Than Expected in the U.S.

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Credit: Courtesy Netflix
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A lot of people watch TV shows and movies on Netflix, but are enough people signing up for the subscription-based streaming video service to justify its growing cost of doing business? That's the question Netflix faced ahead of its fourth-quarter earnings call on Tuesday, following a third quarter in which it didn't attract as many new subscribers in the United States as anticipated.

On Tuesday Netflix reported that 74.76 million people subscribed to its streaming video service by the end of 2015, including 3.92 million people who had signed up for free trials and were still in that unpaid period. That's slightly more people than the company had expected. In October Netflix projected that its global subscriber number would hit 74.32 million by the end of 2015.

However when it came to Netflix's U.S. subscribers -- its largest customer base -- the company failed to add as many new subscribers as anticipated. While Netflix said in October that it expected to add 1.65 million new subscribers domestically, it ended up falling short with 1.56 million. Netflix execs downplayed the size of U.S. subscriber additions miss during the company's earnings call on Tuesday. "We were literally within hours of it," said Netflix CFO David Wells.

That U.S. subscriber growth shortcoming continues a trend that sent the company's stock down when the same thing happened last quarter. In the third quarter of 2015, Netflix fell short of its own estimates for how many subscribers it would add in the U.S. The company blamed that shortcoming, in part, on credit and debit card companies issuing new, more secure cards to people that would require some of those people to update their billing information in order to maintain their Netflix subscriptions.

Netflix's total revenue, including its streaming and mail-order DVD businesses, fell short of analysts' estimates at $1.82 billion, despite growing 23% year-over-year. And as the company telegraphed earlier this month when it touted aggressive global expansion and original content developments plans, Netflix's profits took a hit, with a net income shrinking by 48% to $43.2 million. Conversely, Netflix's costs of doing business -- chiefly the money it pays for all the movies and TV shows its service offers -- increased by 23%.

To help offset its content costs, Netflix will start forcing longtime streaming subscribers to pay the higher monthly rates that the company introduced in 2014. At the time those price hikes were announced Netflix said that existing subscribers would not have to pay the increased fees for two years, and when Netflix upped the price of its high-definition streaming plan yet again in October 2015, it said that those existing subscribers would start to be charged the higher monthly rate in May 2016. On Tuesday Netflix reminded its customers that it's close to time to pay the piper, saying that those subscribers would need to update their subscription plans starting in the second quarter of 2016.

The price hikes and new subscriber additions are increasingly important as Netflix spends more money on licensing other people's content in addition to producing its own to attract and retain its customers as it grows into what Netflix CEO Reed Hastings described earlier this month as as "a global TV network" after announcing that Netflix had launched in 130 new countries, giving it a total footprint of 191 countries. On Tuesday Netflix execs said in a letter to investors that the company plans to premiere 600 hours of original programming this year, up from 450 hours last year.

Netflix continued its tradition of withholding viewership numbers for its original shows. Instead it pointed to its total number of streaming subscribers as its ratings metric of choice. Last week NBC research president Alan Wurtzel revealed viewership estimates for a few Netflix original series based on Symphony Advanced Media's data that sampled 15,000 people's consumption habits. Over the weekend Netflix Chief Content Officer Ted Sarandos said the estimates were "remarkably inaccurate."

In addition to content costs and subscriber growth pressuring Netflix's business, so too is its growing number of rivals competing for audience's attentions and entertainment companies' content.

Last year Netflix's main rival, HBO, rolled out an internet-only version of its TV network that competes directly with Netflix. So did Showtime. And earlier this month Amazon stole the awards season away from Netflix, winning several Golden Globes for its original series over Netflix's shows. Meanwhile Hulu has raised its game by adding a Netflix-style ad-free tier to its service and winning exclusive streaming rights to hit shows like Fox's "Empire." In the past people may have waited until a show like "Empire" hit Netflix to catch up if they missed it when it aired on TV, but now they don't have to, nor do they have to sit through commercials, giving them one less reason to sign up for Netflix or keep paying for Netflix.

Then there are the pay-TV carriers like Comcast, Verizon and Dish Network that have introduced their own streaming video services in the past year. All of these services should combine to persuade more people to watch videos over the internet and catalyze the growth of Netflix's potential subscriber base. But there is only so much time in a day for people to watch shows and movies, pitting these services against one another in competition for audiences' increasing-but-finite attentions.

Coinciding with its increased competition and push to attract more subscribers and retain existing ones, Netflix's marketing costs have also continued to grow. In the fourth quarter the company spent $224.2 million on marketing, up 10% year-over-year.