• by Jack Loechner , Staff Writer @mp_research, August 1, 2018

Netflix released its Q2 2018 numbers recently, and, according to TDG, writes Joel Espelien, the results are less than inspiring. The streaming giant added 5.2 million subscribers worldwide (equaling Q2 2017), adding less than 700,000 new customers in the US. Given its stratospheric stock price, this is hardly the level of growth people have come to expect, says the report.

The idea that everyone is the customer for Netflix, or pretty much any product or service whatsoever, is almost always an extremely flawed assumption. Netflix currently has over 57 million customers in the US, out of roughly 120 million households (as tracked by Nielsen). In other words, Netflix has penetrated half the households in America, says the report. 

The US does have positive household growth at the moment, and new household formation should continue to drive some organic growth for the foreseeable future. The harder question is whether Netflix can actually grow its household share much further. 

Premium video is not a social network like Facebook, Instagram, or Twitter, says the report. It’s not even a search engine like Google or YouTube. The network effects are simply not strong enough to create only one winner. Folks who think Netflix is the next “horsemen” alongside Alphabet, Amazon, Apple, and Facebook are just mistaken.

Netflix has never been a global giant with 1-2 billion customers. Premium SVOD just isn’t that kind of service. Brands certainly matter, but they don’t really create winner-take-all markets. Even a brand like Disney has never been able to monopolize the kids market, even after spending billions to acquire Pixar and Marvel Comics. The best-case scenario for Netflix has always been profitable co-existence with other media brands like HBO, Hulu, Showtime, and others. 

At a minimum four segments are extremely hard for Netflix to reach, and thus put a cap on the service’s ultimate market penetration, says the report. Importantly, these segments exist in every market, not just the US.

• The first are older viewers who are comfortable with TV as it is, whether delivered over a legacy network or streamed over the Internet via MVPDs. Netflix has little appeal for this demographic, which is growing in every country. 
• The second segment includes individuals living in rural areas that lack sufficient bandwidth to stream Netflix adequately. This is neither Netflix’s fault nor its responsibility, but it is a reality that limits the addressable market, notes the report.
• The third segment includes extremely low-income households. Netflix is cheap, but it is still a recurring monthly fee on a credit card, and also requires a reasonably fast bandwidth connection as well as devices capable of rendering that stream on a sufficiently high quality screen. Few people subscribe to Netflix solely so they can watch shows on their phone while on Wi-Fi at Starbucks or the local library. Netflix’s low price, a segment of the market is still not able to afford it.
• Fourth, some people simply don’t watch TV anymore, preferring other amusements (or none at all). Again, plenty of folks are content to live life without Netflix, and no amount of original content is going to attract people who don’t watch TV in the first place.

Concluding, the report says that Netflix is a very successful brand that has millions of fans and still has some potential for growth. In the broadest sense, says the report, Netflix is totally fine. What the latest quarterly numbers clearly demonstrate, though, says the report, is that Netflix is neither a monopoly nor a utility, and it is extremely unlikely that its market share will increase dramatically beyond current numbers. Once the market digests and acknowledges this reality, the Netflix stock price will find significantly more rational levels.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. More of the report may be found here.