Netflix Subscriber Growth Sharply Slows During Second Quarter

CEO Of Netflix, Reed Hastings-Getty-H 2019
Juan Naharro Gimenez/Getty Images

The streaming giant added just 2.7 million paid members during the three-month period.

Amid the threat of more competition from major media companies like Disney and WarnerMedia, Netflix on Wednesday reported slower growth than expected for the second quarter. 

Netflix's paid memberships grew by 2.7 million from April to June, less than half of the 5.5 million it added during the same period last year. In fact, it lost around 130,000 subscribers in the U.S., where it has more market penetration. The company, which now has just over 151 million total paid members, had projected additions of 5 million during the period and Wall Street, per FactSet, was expecting 5.1 million new subscribers. 

Investors sent the stock down more than 10 percent after the market close on the disappointing subscriber growth after Netflix's stock closed the day down nearly 1 percent at $362.44. On Thursday at 9:45 a.m. ET, the stock was down 10.2 percent at $325.43 in early trading.

The streaming giant also reported earnings of 60 cents per share and revenue growth of 26 percent to $4.9 billion, in line with analyst expectations. 

Netflix says its subscriber miss occurred across all regions, but slightly more in areas where its price increase went into effect. Netflix announced in January that its plans would go up in price starting with the May billing cycle. Its standard plan now costs $13 per month in the U.S. 

The company adds that competition wasn't a factor, especially since many of the biggest competitors, including HBO Max and Disney+, have yet to launch. Instead, original programming released during the second quarter — including Dead to Me, When They See Us, Murder Mystery and Always Be My Maybe — failed to drive growth. It's not that the shows weren't watched by subscribers — the streamer noted that Adam Sandler's Murder Mystery is the most-watched of his Netflix originals to date, with over 73 million households tuning in during its first four weeks — but that they didn't entice new subscribers to hand over their credit card information. 

"There was no one thing" that caused the miss, CEO Reed Hastings said in a Q&A taped after the earnings release. He chalked it up, in part, to bad projections. 

The third quarter, which began in July, kicked off with the return of Stranger Things, and Netflix said the first two weeks have been "strong." It is projecting that it will add 7 million new subscribers during the third quarter. The Crown and Orange Is the New Black's final season will also contribute to the second half of the year. 

After years of selling their biggest hits to Netflix, Hollywood studios have cooled on the company. Disney, NBCUniversal and WarnerMedia are all expected to launch their own streaming services within the next year. To build up the value of their offerings, they are reviving well-known IP for new projects and reserving library hits from Netflix. NBCUniversal is paying $100 million per year to take The Office off Netflix and reserve it for its upcoming streamer, while WarnerMedia is paying $85 million per year to put Friends on HBO Max, which will launch in 2020. Both shows have surged in popularity on Netflix in recent years as new generations of viewers discovered them. 

In its note to shareholders, Netflix acknowledged the pending loss of titles like Friends and The Office. "We don’t have material viewing concentration as even our largest titles (that are watched by millions of members) account for only a low single-digit percentage of streaming hours," the company said. "From what we’ve seen in the past when we drop strong catalog content (Starz and Epix with Sony, Disney, and Paramount films, or 2nd run series from Fox, for example), our members shift over to enjoying our other great content."

Hastings also noted in the Q&A that he believes the company is well positioned to weather the coming competitive market. When asked how he felt about the term "streaming wars" being used to describe the influx of new products, the exec said it draws more attention to the space and "because of that, consumers shift more quickly from linear TV to streaming TV." 

July 18, 6:45 a.m. Updated with Thursday early morning stock price.