Netflix‘s video streaming service added in more subscribers than ever during the crucial holiday season, but the company signaled its growth is slowing in the U.S. as it begins to roll out double-digit price increases in its biggest market.
The slightly disappointing forecast issued on Thursday for the opening three months of the new year overshadowed a solid earnings report covering the final quarter of last year – a key period for Netflix because subscriptions to its service are a popular holiday gift.
Netflix ended December with 139.3 million paid subscribers, slightly better than analysts had anticipated, according to FactSet. Of that total, 58.5 million were in the U.S., in line with what Netflix had projected.
Management predicted the company will gain another 8.9 million subscribers from January to March, but only 1.6 million are expected in the U.S. That is down substantially from an increase of 2.3 million paid U.S. subscribers at the same time last year.
That downturn in the U.S. raised alarms because Netflix is starting to raise its prices in the country by 13 to 18% this quarter, a move that Netflix is making to help pay for its rising programming costs as it competes for exclusive series and films against Amazon, Hulu, AT&T and Apple.
But the higher U.S. prices also threaten to cause some existing subscribers to cancel the service and discourage prospective new customers from joining. That phenomenon could undercut the subscriber growth that propels Netflix’s stock price more than any other factor.
Netflix’s shares fell nearly 4% in Thursday’s extended trading after the earnings report and forecast came out. Even so, Netflix’s stock remains above its levels before the company announced the U.S. price increase earlier this week, a sign that more investors believe management is doing the right thing for the company’s long-term financial health as it continues to burn through more cash than it is bringing in.
The company based Los Gatos, California, had a negative cash flow of $1.3 billion in fourth quarter, bringing its total for all of 2018 to a negative $3 billion. Netflix expected to burn through another $3 billion this year as it continues to spend heavily for the rights to acclaimed series, such as “Stranger Things,” and popular movies, including the recently released “Bird Box,” which the company said has been watched by 80 million households since its Dec. 21 debut on the streaming service.
But Netflix remains profitable under the accounting rules allowed for entertainment companies. It earned $133.9 million for the fourth quarter, a 28% decrease from $185.5 million at the same time in the prior year. Revenue for the past quarter climbed 27% from the previous year to $4.2 billion, in line with analysts’ estimates.
Fortnite bigger competition than HBO
Netflix has staked its future on global expansion and creating original TV shows and movies to hook new customers and keep them paying monthly subscription fees.
But it faces increasing competition from established TV and movie producers such as Walt Disney, which has stopped supplying new movies to Netflix in order to stock its own streaming service planned for later this year.
AT&T and Comcast also have digital offerings in the works.
“The worry is that international bruisers like Disney and Amazon aren’t going to go down without a fight, and both have the financial clout to counterpunch pretty hard,” said George Salmon, an analyst at Hargreaves Lansdown. “The battle for viewers’ eyeballs is only just getting started.”
Netflix Chief Executive Reed Hastings however played down such competition in a livestreamed interview after the company’s earnings report, as his company now competes with many rivals.
“Any one provider entering only makes a difference on the margin,” he said.
Netflix said it lost more of its customers’ viewing time to the video game Fortnite than HBO, the premium cable network owned by AT&T.
The video streaming giant also said its programming now accounts for about 10% of television screen time in the United States, a sign of its popularity but also the room for growth.
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