As streaming competition mounts, Netflix Inc. will have a difficult — but not impossible — time driving new growth.
Netflix's primary streaming business is battling other well-funded platforms such as The Walt Disney Co.'s Disney+ and Hulu, AT&T Inc.'s HBO Max, Apple Inc.'s Apple TV+ and Amazon.com Inc.'s Prime Video. Analysts say this competition, coupled with Netflix's incumbent position in the market, will make it harder for the company to add new subscribers. But they still see some opportunities ahead, such as Netflix's foray into gaming and efforts to end password sharing.
"The low hanging fruit has already been picked in terms of subscribers. Where is the growth going to come from?" said Seth Shafer, an analyst with Kagan, a media research group within S&P Global. "I do think we're going to see a new normal for what we consider good numbers."
The U.S. and Canada are already mature video markets. Netflix has been posting relatively flat numbers in its domestic regions for some time, with the UCAN segment dropping 400,000 paid net members in the second quarter. International gains pushed Netflix to total net adds of 1.5 million in the June period.
Competing for eyeballs
Domestic consumers watch about eight hours per day of TV, including streaming and traditional pay television, and that average has remained steady for some time, Shafer explained, citing recent survey data from Kagan. This means that as more platforms come on the market, they are all competing for a limited amount of viewing hours.
While Netflix has the advantage of a large existing subscriber base, other major platforms have the advantage of fresh catalogs of content that viewers cannot find on Netflix and original franchises that attract new signups and keep viewers engaged on a weekly and seasonal basis. Netflix's habit of releasing series all at once and ending franchises after about three seasons is wearing on demand for the platform, said Julia Alexander, senior strategy analyst at streaming research and consulting firm Parrot Analytics. Meanwhile, platforms like Disney+ are keeping members on the line with new episodes released week after week. Their shows tie to universes of content that span TV, film, games and merchandise.
"For the last few quarters, we've observed demand for Netflix originals, both globally and in the U.S., steadily decreasing thanks to increased competition from Disney+, Apple TV+, and HBO Max," Alexander said. "Fans are following franchises. Marvel Studios and Star Wars are consistently strong, top-demand shows that garner consistent, global demand. Netflix hasn't seen as many franchises return."
For the year ended June 19, Alexander's Parrot Analytics showed demand for Netflix original series was 2.0x that of the average streaming original series in the market. Comparatively, materially behind the demand for Hulu series at 3.0x the average, Apple TV+ series at 3.8x the average, HBO series at 4.3x and Disney+ series at 4.8x.
"Certain platforms, domestically, are hitting saturation points. Netflix is the biggest," Alexander said.
Bright side
While opportunities for growth may be harder to come by, Netflix is still operating from a point of strength with its massive global subscriber base.
"They'll continue to be a tier-one provider, and that's the holy grail everyone is hoping to accomplish," Moody's analyst Neil Begley said.
International expansion will be the primary driver for membership expansion for the foreseeable future, analysts agree, but other potential strategies could also emerge.
Begley believes Netflix can attract a material amount of new members and membership growth if it cracks down on password sharing. By some estimates, 20% of the domestic usage on Netflix comes from viewers that borrow passwords from paying members. If Netflix was able to end that practice and convert even a substantial fraction of those viewers to paying members, it would represent significant new growth for the company.
For her part, Alexander at Parrot Analytics believes Netflix still has much to capitalize on in its position at the top, even if growth will not be as easy as it used to be.
"While it can read like doom and gloom, Netflix is still in an incredible position, and its global footprint proves that it's nearly untouchable on a global scale. Being able to have international hits that travel to tens of different countries is still a very rare feat that Netflix has accomplished," she said.
Other levers
The company can also continue to fine-tune its recommendation algorithm to reduce churn, Alexander said. Currently the company recommends films based on their similarity with other films a member has preferred. For example, if a member enjoyed the dystopian sci-fi series "Squid Game," Netflix will recommend other dystopian sci-fi content.
"Humans inherently want a variety of entertainment in their life," Alexander said. "Netflix, and others, could use recommendations that look at affinity between shows to find out what else is being watched, but different enough that it could lead to increased session time or discovery."
Elsewhere, Netflix is also investing in gaming as a driver of new growth. Given the high-investment, high-risk nature of gaming, analysts are still unsure of how the strategy will play out. Wedbush Securities analyst Michael Pachter, for example, said he commends the company for attempting to address the "generational shift" in leisure time toward gaming and away from TV content, but the technical and competitive challenges involved make success in the field far from a foregone conclusion.
"In our view, investors have given Netflix way too much credit for pulling off this ambitious (some might say audacious) endeavor. We view the foray into games as an acknowledgement by management that the video content pipeline is flowing more slowly," the analyst said in an Oct. 14 note.
Share price growth for Netflix has remained below the S&P 500 for much of the year-to-date as of Oct. 13, though recently the stock and broad-market index aligned, both up over 16%.
