Netflix And The Challenge Of Scaling Beyond Being The Disruptor

Wall Street has focused on Netflix failing to hits its subscriber growth targets through adding 1.7 million net subscriber gains rather than the 2.5 million target. The share sell off reflects a growing perception that Netflix’s growth is beginning to stall. The reasons for this are a combination of already high levels of domestic penetration rates and increased pricing models for the service which have been introduced since last October.

Trying To Be A TV Disruptor Without Having Core Pay-TV Offerings

The increased churn rates that Netflix has experienced since it raised its prices indicate that it has still has someway to go before it can be perceived as a viable alternative to traditional TV. Without fully replicating the content diversity of the large Pay-TV incumbents, namely the glaring absence of Sport and News, Netflix will always struggle to justify increased prices in its domestic market. This is compounded by the challenge of nearing peak saturation in the US, with Netflix CEO Reed Hastings stating at CES in January that Netflix now had penetration in half of US households. MIDiA Research’s latest consumer survey shows that 40% of US consumers now watch Netflix on a weekly basis. 

Investors Need To Recognize That The Next Few Years Is All About International Growth

The already high levels of domestic penetration and the clear gaps in Netflix’s premium content offerings mean that it cannot easily increase domestic growth without substantial investments in new content which would be fiercely resisted by Pay TV incumbents such as ESPN, who’s commercial existence depends upon premium sports offerings. Netflix’s competitive advantage therefore lies in its international scope - as the only truly global SVOD (Subscription Video On Demand) service provider available in 130 countries, it can go where other competitors currently cannot.

A closer look at Q2’s figures show that Netflix’s paid subscribers are growing six and a half times as quickly internationally as they are domestically, and overall paid subscribers are growing a third more quickly than free subscribers. For a company that needs to rebalance its membership base to an international focus and increase profitability they are moving in the right direction. Netflix’s challenge however is that due to its dramatic growth in domestic membership growth figures resulting from the launch if its streaming service in 2007, Wall St has fallen in love with the company and as such is used to dealing with an explosively growing tech disruptor. With a whole SVOD ecosystem now competing around Netflix, the low-hanging fruit in the US has now been plucked, and pure SVOD play growth is now going to come from clever growth strategies in key international markets. 130 countries is too many for Netflix to effectively target, which is why it is focusing on English speaking affluent elites in each of those territories who currently have credit cards and focusing on specific countries such as Japan and France to grow paying memberships with premium original content such as Atliers and Marseille. The future overall growth is set to be slow and steady for Netflix if they do not decide to diversify away from their current content offering strategy.