Netflix has shocked with its worst fall in quarterly new subscriber numbers with an unexpected and significant shortfall on its own forecasts for the June quarter.
The news saw Netflix shares fall more than 12% in after-hours trade which on Wednesday. That fall was sustained in trading on Thursday, with the shares down 10.3% at just over $US325. The value of the company fell by around $US14 billion. US analysts reckoned the weak quarter was a one-off and forecast that the streaming giant would bounce back this quarter.
Wall Street stumbled at the start of trading but ended higher after senior members of the US Federal Reserve added to hints that the central bank could cut rates when it meets later this month.
The result is the first from the so-called FAANG group of mega techs (Facebook, Apple, Amazon, Netflix, and Alphabet (Google) which these days set the tone for the rest of the US market and have a big influence globally.
The news will see local analysts start to question plans Nine Entertainment has for its Stan streaming service which is the second player in Australia after Netflix.
On top of that, there’s the Foxtel Now and Kayo (sports) streaming services of Foxtel, 65% owned by News Corp and 35% by Telstra.
Nine, Stan, News Corp, and Foxtel managements will all regard the Netflix news as a one-off, but when the market leader suffers catches a bad dose of the flu.
Foxtel’s services and Stan have no international significance, unlike Netflix which is where its future growth is going to be generated.
How long will it be before Australian consumers, already hit by low income and wage growth, high debts and weak house prices, regard streaming services as a luxury and start cutting back?
It could very well start with the likes of Disney, Apple, Fox, and Amazon, not to mention HBO, all rumoured to be ready to launch services globally from later this year.
The subscription miss was Netflix’s largest since the June quarter of 2016. And in the biggest shock of all, Netflix told the market Thursday morning, Sydney time that it had lost 126,000 US domestic paid subscribers vs. an expected gain of about 310,000 in the three months to June.
That was a turnaround of nearly half a million in the US. International subscriber numbers though picked up to 4.8 million from the forecast 4.7 million. That was ignored by investors.
Netflix’s shock news will have an impact locally on the value of Nine Entertainment. Nine has reportedly been trying to sell a stake in by the end of the year, preferably to Disney (which starts its own global streaming business shortly).
Nine wants to sell a stake because Disney is Stan’s most important content supplier and selling a shareholding to the US giant could keep it out of the Australian market, or limit its presence via geo-blocking.
Now Netflix has shown that there is a limit to the business in the US which remains the sector’s most important market. That message will be not lost for Australia and investors here. Australia is a mature media market with Netflix leading Stan as the two biggest video streamers in the country.
Netflix has shown that future growth in a core, mature media market is going to get tougher. Stan has no appeal whatsoever globally and is at rising risk in Australia as growth slows.
Netflix reckons a slate of new and returning series in the next few months (It is spending more than $US3 billion a quarter on content production) that will do the trick and halt the slide and is forecasting it will pick up 7 million new subscribers in the three months to September. That’s nearly 30% more than the figure it missed in the second quarter.
That doubling down by Netflix management is an enormous biggest risk for the company, the streaming sector globally and Wall Street and other markets. If Netflix misses that estimate in three months time, there could be a bloodbath.
