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Netflix reports drop in U.S. subscribers, its first ever, raising concern about its future

The decline came even before the loss of two of its most popular shows

(Gabby Jones/Bloomberg News)

In recent months, questions have arisen about Netflix’s future as it faces a growing list of streaming competitors.

The future could be coming sooner than expected.

Netflix reported subscriber numbers lower than even its own estimates for the second quarter, causing a Wall Street sell-off and fears the streaming service could be in danger of losing its dominance.

The company’s U.S. subscriber total dropped by 126,000 in the second quarter; analysts had expected the figure to increase by 352,000. Netflix had projected growth of 300,000.

It was the first time Netflix has seen a quarterly drop in domestic subscribers since the firm began its explosive growth earlier this decade.

And while earnings and revenue came in largely as analysts expected — $4.92 billion compared to an expected $4.93 billion on the latter — Netflix’s international subscribers grew by just 2.83 million compared to the 4.81 million analysts had predicted. Netflix had given guidance of 4.7 million new international subscribers for the quarter.

Investors sent the stock down 11 percent in after-hours trading.

Netflix’s quarterly reports have become a key event on the financial calendar, offering coveted pieces of data for a company where transparency can be elusive. Subscriber numbers in particular are a key bellwether for the streaming business and, especially, Netflix’s place in it.

Unlike nearly all media conglomerates and streamers, Netflix depends on subscribers as its sole source of revenue, with no ads, merchandising or other income serving as backstops.

Netflix sought to play down the subscriber totals.

“It’s easy to over-interpret the quarter membership adds,” Reed Hastings, Netflix’s chairman and chief executive, told Wall Street analysts shortly after the figures were disclosed. “We’re just executing forward and trying to do the best we can.”

Michael Morris, an analyst from Guggenheim Securities, pressed Hastings, asking why “an investor shouldn’t look at this quarter and say perhaps the business is approaching maturity more quickly than we anticipated.”

Hastings said that Netflix remained a market leader in a sector that was still solid. “If investors believe in Internet television, then our position in the market is very strong.”

Netflix still boasts some 150 million subscribers globally and remains the service of first resort for many consumers. But the prospect of a subscriber slowdown is compounded by the launch of new services, including Disney+ in the fall and HBO Max next year, competing for viewers’ dollars.

In an investor letter, Netflix explained the bleak numbers as part of a “pull-forward” effect from the first quarter, when subscriber additions nearly totaled 10 million worldwide.

The dismal subscriber numbers could also be the result of a price hike. The company announced an increase from $10.99 to $12.99 in January 2019 and completed it in the second quarter. The jump applied to the United States, as well as Latin American and Caribbean countries.

“Where we increased prices we did see some elevated churn rates and lower retention,” Netflix chief financial officer Spencer Neumann said.

But he was quick to say the subscriber drop was worthwhile. “The slowdown in subscriber growth because of pricing — that increased revenue is very good for our business.”

In the letter, the company also touted its Emmy success. Shows such as “Dead Like Me” and “Russian Doll” notched key nominations, powering Netflix to 117 total nominations, a large number that was nonetheless topped by HBO’s 137.

Emmy-decorated shows remain a key source of buzz and a driver for Netflix subscribers, though such programming also tends to be costlier for the service.

The streamer saw lower-than-expected subscriber figures in the second quarter last July, which it attributed to seasonality and said would bounce back in future quarters, which largely happened.

But the coming months could be trickier. WarnerMedia recently decided against renewing its deal for Netflix to air “Friends” as it prepares to launch its own service, and NBC Universal is doing the same for “The Office.” Both shows are very popular, and their departure could lead, investors fear, to mass subscriber exits.

Netflix has been ramping up its original content to combat those departures and keep its service a must-have. Executives in the letter pointed to the debut this month of the new season of “Stranger Things,” which according to Nielsen garnered 26.4 million viewers in its first four days of release.

“Content comes and goes,” Netflix chief content officer Ted Sarandos said when asked about “Friends” and “The Office.” “We grow through that by making these early investments in original programming and getting our own consumers and our members much more attuned to the expectation that we’re going to create their next favorite show — not that we’re going to be the place where you’re going to get everything every time.”

Whether consumers, who’ve grown accustomed to Netflix as a one-stop shop for TV shows and movies, also view it that way remains to be seen.

In a note last week, Wedbush Securities analyst Michael Pachter said that despite the popularity of these originals, it “is unclear whether Netflix can replace it with quantity and quality sufficient to keep its current subscriber base loyal.”