Netflix Executives Warn of "Headwind" to Growth From New Streamers

Ted Sarandos-Getty-H 2019
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The streaming giant argues that new competitors will "accelerate the shift from linear TV to on-demand consumption of entertainment."

Netflix executives are acknowledging that new streaming services like Disney+, WarnerMedia’s HBO Max and NBCUniversal’s Peacock will likely impact the streaming giant’s growth prospects in the short term.

In a letter to shareholders Wednesday, Netflix said that there would be “modest headwind to our near-term growth” thanks to the “noisy” launch of these new services (Disney+ is set to launch Nov. 12, while HBO Max and Peacock are slated to bow in the spring).

Netflix content chief Ted Sarandos also warned that the cost of "elite" content is rising dramatically, thanks in large part to aggressive new bidders.

"On a very competitive show, there has probably been 30 percent price escalation since last year," the exec said during the company's quarterly earnings interview on Wednesday, adding that "it’s an elite few shows that would see that escalation."

Beyond the programming, the new competition was one of the most discussed topics during the interview.

"It is interesting that we see both Apple and Disney launching basically in the same week after 12 years of not being in the market," Netflix CEO Reed Hastings said during the earnings interview. "Fundamentally, it is more of the same. Disney is going to be a great competitor; Apple is just beginning, but they will probably have some great shows, too."

The new competition is also a factor in the company's subscriber growth outlook for the year, with Netflix forecasting 26.7 million total additions in 2019, down from 28.6 million adds in 2018. "Inevitably there will probably be some curiosity and some trial of those competitive service offerings," said Netflix CFO Spencer Neumann. "It will be nice to have some of these competitive launches in the rearview mirror so that we can continue to look forward."

The company’s pitch to investors is that “we [meaning all the new streaming services] are all small compared to linear TV.”

“In our view, the likely outcome from the launch of these new services will be to accelerate the shift from linear TV to on-demand consumption of entertainment,” the letter adds.

To support its argument, Netflix highlighted subscriber numbers in the U.S. and Canada going back to 2013. In the U.S., Hulu is a large player in streaming video, with about 30 million subscribers. It is not yet offered in Canada, but Netflix’s subscriber chart showed essentially identical subscriber growth between the two countries, implying that consumers overall are shifting to streaming video.

Netflix goes on to compare the launch of these new streaming services to the early days of cable TV.

“These once-in-a-generation changes are very large and open up big, new opportunities for many players,” the letter says. “For example, for the first few decades of cable, networks like TBS, USA, ESPN, MTV and Discovery didn’t take much audience share from each other, but instead, they collectively took audience share from broadcast viewing.”