Netflix Misses Subscriber Growth Forecast, but Downplays Its Streaming Competition

With the upcoming loss of two of its most-streamed television series, The Office and Friends, Netflix has had a tough few weeks. On Wednesday, the company faced down another bout of bad news: The streaming service told investors it missed its paid membership growth forecast by nearly half and its U.S. paid memberships slightly dropped. In the second quarter of 2019, Netflix's paid membership grew by 2.7 million, a 24% year-over-year increase, which fell far short of the 5 million subscribers Netflix had forecast it would attract in the quarter, the company wrote in a letter to shareholders Wednesday. All in all, Netflix has a whopping 151.6 million global subscribers, according to the company—still an enviable position in an ever-more-competitive streaming space. Netflix said its missed forecast was slightly higher in regions where the company recently increased its subscription, and said it didn't think competition from other streaming services was a factor in the slowed growth. "We forecasted high. ...There was no one thing," CEO Reed Hastings said in an earnings interview. In the U.S., paid memberships fell slightly this quarter—by 126,000—to a little over 60 million total subscribers. Netflix says it anticipates membership growth in the U.S. to pick up slightly in the third quarter. Last month, NBCUniversal said it had secured exclusive streaming rights for the ultrapopular mockumentary sitcom The Office on its yet-to-be-named streaming service, meaning that all nine seasons of the program will depart Netflix beginning in 2021. Two weeks later, Netflix suffered another blow when WarnerMedia’s upcoming streaming service HBO Max snapped up the exclusive streaming rights to all 236 episodes of Friends beginning in 2020. Those two shows, according to Nielsen, represented more than 84 billion minutes watched on Netflix in 2018. But Netflix downplayed the loss of those shows, telling investors that not having to pay for Friends and The Office will free up financial resources for the company to invest in other programming. "Much of our domestic, and eventually global, Disney catalog, as well as Friends, The Office, and some other licensed content will wind down over the coming years, freeing up budget for more original content," the company's shareholder letter read. "From what we’ve seen in the past when we drop strong catalog content (Starz and Epix with Sony, Disney, and Paramount films, or 2nd run series from Fox, for example) our members shift over to enjoying our other great content." During the earnings interview, Ted Sarandos, chief content officer said "content comes and goes," and Netflix will focus instead on convincing users that "we're going to create their next favorite show." Netflix, which received 117 Emmy nominations on Tuesday, is staring down an even more competitive streaming space as legacy media companies rush to capitalize on changing consumer habits. Disney is preparing Disney+, which is slated to premiere on Nov. 12, while other services from Apple, WarnerMedia, NBCUniversal and Discovery are all in the works over the next year. In Wednesday's shareholders' letter, Netflix pointed to the increasingly competitive landscape, writing that competition would be "fierce." However, the company said its ad-free format is what would make it stand out among its rivals and attract consumer dollars. "We, like HBO, are advertising free," the shareholder letter read. "That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction." As it so often does, Netflix let shareholders in on the viewership of some of its biggest releases and most-talked-about programming over the quarter. Netflix measures programming internally, and there are no independent numbers to verify the claims, but Netflix says it counts a viewed episode or show when 70% of an episode (or the movie) is completed. The company said that the dramedy Dead to Me, starring actress Christina Applegate, was viewed by 30 million households in its first four weeks on the streaming service. The Ava DuVernay-directed limited series When They See Us, chronicling the Central Park Five case, was viewed by 33 million households in the first four weeks on the service, making it Netflix's highest-watched original docuseries, Netflix said. (Both shows were nominated for Emmys this week.) The company also touted its push into original films, some of which had considerably higher viewership in the first four weeks on the service than Netflix's original television programming. Murder Mystery, starring Adam Sandler and Jennifer Aniston, was watched by more than 73 million households in the first four weeks. The young adult romantic comedy The Perfect Date was viewed by 48 million households in its first four weeks, Netflix said. There was no mention of viewership numbers for Stranger Things' third season, but Netflix emphasized the program's brand partnerships as evidence of a growing revenue stream. In the letter, Netflix also pointed to the arrival of new CMO Jackie Lee-Joe as part of the company's continued effort on emphasizing its slate of original and key titles in its marketing to build relationships with its customers.