Has Netflix's Soaring Growth Finally Hit a Wall?

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Netflix CEO Reed Hastings

Even before Disney and WarnerMedia launch their streaming rivals, the Reed Hastings-led company is contending with a saturated U.S. market.

For years, the biggest question surrounding Netflix has been: How long can the good times last?

The streaming giant has watched its stock soar nearly 500 percent since 2014 as sequential quarters of subscriber growth made up for its mounting content spend, estimated at $15 billion in 2019. Then, on July 17, Netflix reported its first loss of U.S. subscribers since its bungled 2011 Qwikster launch, sending the stock down more than 10 percent.

While one quarter wasn't enough for observers to sound an immediate alarm — research firm Pivotal sent a note after the earnings report warning not to "make a mountain out of a molehill" — it was enough to signal that Netflix's rapid expansion won't continue forever, especially with competition from major media companies like Disney, WarnerMedia and NBCUniversal forthcoming.

In a note to shareholders and a subsequent Q&A video, CEO Reed Hastings explained that "there was no one thing" that caused a loss of 130,000 U.S. members and lower-than-expected 2.83 million additions abroad. Instead, he chalked it up to a variety of factors, including a price increase that went into effect in May and a dearth of originals that would drive people to pull out their credit cards.

Although projects like Dead to Me (30 million viewers worldwide in its first month) and When They See Us (25 million worldwide in the same frame) were well received — according to viewership numbers released by Netflix — they didn't pack the same punch as Stranger Things (40.7 million viewers worldwide in four days), which came out four days after the quarter ended. That puts pressure on Netflix to churn out hits and, notes Macquarie analyst Tim Nollen, "raises the stakes on producing and timing popular shows and marketing them effectively." 

Those stakes are becoming especially high in the U.S., where Netflix is nearing market saturation. Hastings has said previously that he expects the company's domestic subscriber base to level out between 60 million and 90 million. Netflix has just barely cracked that range with 60.1 million paid members as of June 30. A loss of subscribers at the lower end of that threshold suggests to media consultant Matthew Ball that reaching 90 million "is going to be harder and take longer than anyone expected." One reason, per Ball, is that the company will no longer be able to rely on shifting consumer behavior to help boost its numbers. Essentially, people likely to cut the cable cord probably already have. "We're now nine years from peak TV penetration and peak pay TV usage," he explains. "Those who haven't moved [to streaming] yet are less likely to move in the immediate future." 

The international market is where Netflix has the most opportunity to grow. During the Q&A, Hastings noted that there are 700 million households abroad that pay for TV (excluding China, where Netflix doesn't operate). Netflix currently has just 91.5 million subscribers outside of the U.S., giving it plenty of runway to add new members as it bulks up on local language originals and licensed programming. 

The question that looms is just how Netflix's business will be impacted by the pending launches of Disney+, HBO Max, Apple TV+ and NBCU's unnamed direct-to-consumer offering. Hastings has shrugged off the threat of new streamers — he noted July 17 that "it's not a zero-sum competition" when it comes to luring subscribers — but they are still having an impact on his business, namely making plans to pull programming like The Office and Friends from the platform. Even though, per Netflix, no single title accounts for more than 10 percent of total streaming hours on the platform, the loss of programming combined with increased competition for users' dollars and time could eventually have some impact on the business. For instance, Nollen notes that subscriber churn could become more common, explaining, "We do expect consumers to jump on and off these services more frequently."

This story first appeared in the July 19 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.