Netflix’s Pandemic Subscriber Surge Slows, Missing Forecast, After Record First Half

In its previous 2020 earnings calls, Netflix warned investors that its two back-to-back quarters of surging global subscriber growth would slow considerably by the second half of the year. And it looks like that time has come. The streaming giant told investors today that it had only added 2.2 million paid subscribers globally in the third quarter, missing its own modest projections of 2.5 million additions. The slowdown in growth was most pronounced in the United States and Canada, where the company added only 180,000 new subscribers compared to the 2.9 million paid subscribers it brought in last quarter. In the region, Netflix counted just over 73 million total subscribers for the quarter. Netflix executives downplayed the slowdown, which comes after two back-to-back quarters of higher-than-expected growth for Netflix driven by stay-at-home orders and other Covid-19-related shutdowns that prompted a surge in memberships and streaming usage. Netflix reported 15.7 million new subscribers in the first quarter of the year, and 10 million in the second quarter, both of which beat projections and previous comparable quarters. On a video interview with investors Tuesday, Netflix vice president of finance/investor relations and corporate development Spencer Wang said that if the third quarter had been 48 hours longer, the company's subscriber numbers would have been slightly over Netflix's projected 2.5 million subscriber additions. The company also told investors it expected it would add 6 million new subscribers in the fourth quarter, bringing projected annual growth to 34 million new subscribers. But Netflix’s subscriber growth trajectory is expected to level out further as the effects of the pandemic subside on subscription sign-ups. “The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-Covid,” the company said its investors letter. “In turn, we expect paid net adds are likely to be down year over year in the first half of 2021 as compared to the big spike in paid net adds we experienced in the first half of 2020.” Even with the slowdown in growth, Netflix now boasts slightly more than 195 million subscribers worldwide, and has already surpassed the number of new subscribers it brought into the service than it did in all of 2019. In the first nine months of 2020, Netflix added 28.1 million paid memberships, exceeding the 27.8 million that the company had in the entire previous year. The company said it expects to break 200 million global subscribers before the fourth quarter is up. The slowdown in subscriber growth highlights the importance of international growth opportunities, which give streamers more room for growth as the U.S. market saturates. Of the 2.2 million net additions for Netflix, growth in the Asia-Pacific region was more considerable, accounting for nearly half of all Netflix’s quarterly subscriber growth with slightly more than 1 million net additions. Netflix is pursuing local partnerships in India, including mobile operators and payment processors, to help cement the service’s growth in that market. That international footprint has also been helpful with the return to production, which has hamstrung some other streamers who have shorter turnaround times for their programming. Netflix, which has remained somewhat insulated from the effects of production shutdowns on its content pipeline because it works years out, has returned to production in Europe, the Middle East, Africa and Asia, and is slowly resuming production in Latin America, the United States and Canada. The streamer has completed filming on more than 50 productions since production shutdowns began in March, and production has resumed on some of its buzziest titles, including the fourth season of Stranger Things and the second season of The Witcher. Netflix plans to complete filming on more than 150 other productions by the end of 2020, and said that despite the pandemic, its plans to release even more originals in 2021 than it did in 2020. On a video interview with investors Tuesday, co-CEO and chief content officer Ted Sarandos said that the 2021 slate would not be disrupted. "We're looking at the '21 slate, everything that we forecast for '21 we expect to hit in '21, with a few minor exceptions," said Sarandos, who said Netflix production was "nearly fully operational" around the world. "Some may be a little more back-weighted than we had planned for last year—but we plan on it all coming out." While Netflix is investing heavily in original programming, its licensed titles are still some of the streamers’ most popular. Cobra Kai, the Karate-Kid-based YouTube original series from 2018 that Netflix scooped up earlier this year and released on the service on Aug. 28, was watched by 50 million member households in its first four weeks on the service, Netflix said. (The streamer counts a view when a household watches two minutes of a program.) It's unlikely that Netflix will pursue the reverse and license its own originals elsewhere. Early tests, including Netflix's decision in 2016 to license the first season of drama Narcos to Univision to grow interest in the title, have not been successful. (The show, owned by French production company Gaumont, began streaming on ViacomCBS-owned free streamer Pluto TV beginning today.) "Mostly I think it's helpful for us to keep our original content on Netflix so people understand the value proposition of Netflix," Sarandos said. "We have seen our ability to grow a show that was on another network or a smaller outlet pretty meaningfully, but we've not necessarily seen it the other way around when we've experimented in the past." There were other standout titles in the quarter, with Ryan Murphy original Ratched attracting 48 million member households in its first four weeks. Documentary film American Murder: The Family Next Door, which has been a reliable fixture among Netflix’s Top 10 list, is projected to attract 52 million households in its first 28 days on the service, while documentary The Social Dilemma had 38 million households watch it in 28 days. A September shake-up and streamlining of the company’s television operations that elevated Netflix vp of local language originals Bela Bajaria and prompted the exit of longtime programming exec Cindy Holland underscores Netflix's new growth areas: unscripted programming and local language originals, both programming that Bajaria has experience with. "These are two areas of the business that are going to grow three or four times in the next three to five years, so I thought that [Bajaria] was really well-suited to take on that organization," Sarandos said. Netflix will also continue to focus on international programming that the streamer hopes will travel well to various markets, a focus that had been made clear by the executive shuffle two months ago. “We continue to invest heavily in local language content because we believe that great stories are universal: they can come from anywhere and be loved everywhere,” the company said. And as always, Netflix seemed unfazed by competitors. “This past quarter, we saw the debut of Comcast’s Peacock, which comes on the heels of the launch of HBO Max and Disney+,” the company said. “Disney’s recent management reorganization signals that it is embracing the shift to streaming entertainment. We’re thrilled to be competing with Disney and a growing number of other players to entertain people; both consumers and content creators will benefit from our mutual desire to bring the best stories to audiences all over the world.”