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Netflix Q2 subs drop after price hikes

Todd Spangler
For the first time in eight years, Netflix lost subscribers in the US

For the first time in eight years, Netflix lost subscribers in the US -dropping a net 130,000 for the second quarter of 2019 -- and added nearly two million fewer international customers than expected, sending the stock tumbling.

Paid subscribers grew by 2.7 million, including 2.83 million internationally, almost half that of Netflix's previous guidance of 5.0 million net adds.

Netflix shares fell more than 12 per cent in after-hours trading on Wall Street.

The company said the Q2 subscriber results were the result of a weaker content slate in the quarter, which drove fewer paid net adds than anticipated, and said price hikes also hurt subscriber additions.

Netflix last reported a drop in US subscribers in Q3 2011, after it split apart its DVD-by-mail and streaming services.

The company expects to rebound in Q3, projecting 800,000 US net adds and 6.2 million internationally, for 7.0 million paid memberships overall (up from 6.1 million in Q3 a year ago).

"Consumers around the world continue to move from linear television to internet entertainment at a remarkable rate," the company said in its letter to shareholders.

The Q2 results include the effects of Netflix's US price increases, where the Standard two-HD stream plan rose from $US10.99 to $US12.99 per month, a price hike that was completed during the quarter.

The company also is rolling out price increases across Europe including in the UK, Spain, France, Ireland and Germany.

"Our missed forecast was across all regions, but slightly more so in regions with price increases," the company said in announcing results.

Netflix said it didn't believe competition was a factor for the subscriber miss: "Rather, we think Q2's content slate drove less growth in paid net adds than we anticipated."

Even as it blamed a light content lineup for the botched forecast, Netflix touted viewing figures - again - for a few selectively picked titles that premiered in Q2.

Those included "Dead to Me," a dramedy series starring Christina Applegate (watched by 30 million households in its first four weeks, according to Netflix's unverifiable stats) and Ava DuVernay's limited series "When They See Us" (watched by 25 million households), which was just nominated for 16 Primetime Emmy Awards.

It also claimed YA romantic comedy movie "The Perfect Date" starring Noah Centineo was a "global hit" watched by 48 million households in its first four weeks. According to Netflix, the Ali Wong-Randall Park romcom "Always Be My Maybe" was viewed by 32 million households in its first four weeks.

Netflix called out Q3 releases including "Stranger Things" season 3 and the seventh and final season of "Orange Is the New Black" - the two shows that topped a recent survey asking Netflix customers to pick their favorite shows.

Also coming to the service in the current quarter are "Ozark" season 3, Jerry Seinfeld's "Comedians in Cars Getting Coffee," "The Dark Crystal: Age of Resistance," as well as comedy specials including those from Aziz Ansari, Whitney Cummings and Katherine Ryan.

Original films on tap for later in 2019 include "The Irishman" from Martin Scorsese and action movie "6 Underground," directed by Michael Bay and starring Ryan Reynolds.

On the Q2 subscriber miss, Netflix also said its net add of 9.6 million streaming subscribers in Q1 was so large, there may have been "more pull-forward effect than we realised.

In prior quarters with over-forecasts, we've found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well."

Netflix posted revenue of $US4.92 billion, in-line with Wall Street's $US4.93 billion forecast, and earnings of 60 US cents per share, topping analyst consensus estimates of EPS of 56 US cents.

In the year ahead, Netflix will face significant new competition, with Disney Plus and Apple TV Plus slated to debut in the fall and streaming services from WarnerMedia and NBCUniversal on tap for 2020.

With the traditional media giants rolling into its space, Netflix also is set to lose popular licensed shows like "Friends" (to WarnerMedia's SVOD service) and "The Office" (to NBCU's).

Currently, content from NBCU, Disney/Fox and Warner Bros. accounts for 60 per cent to 65 per cent of Netflix's viewing hours, and over time much of that will be pulled back, according to Wedbush Securities analyst Michael Pachter.

"[W]e expect the migration of third-party content to be relatively slow," he wrote in a note last week.

However, "it is unclear whether Netflix can replace it with quantity and quality sufficient to keep its current subscriber base loyal."

In its letter to shareholders, Netflix acknowledged the loss of licensed content but put an upbeat spin on it - saying that will free up "budget for more original content."

The company claimed that even the most popular titles account for only a low-single-digit percentage of streaming hours.

"From what we've seen in the past when we drop strong catalogue 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," Netflix said.

Netflix, citing the coming SVOD launches by Disney, Apple, WarnerMedia, and NBCU, said competition in the sector "is fierce for all companies and great for consumers."

But it also said in the US, customers spend only about 10% of their TV-viewing time on Netflix "and less of their mobile screen time, so we have much room for growth."