Netflix (NFLX 1.71%) reported disappointing Q2 results last week, due to an uptick in subscriber cancellations that began in April. This caused subscriber growth to fall well short of most investors' expectations.
Nevertheless, Netflix executives remain confident about the company's long-term growth trajectory. Let's take a look at five points they emphasized during their post-earnings interview last Monday.
A huge long-term opportunity remains
Everyone is using internet video and internet television more and more. ... And I don't see why 10, 20 years from now, why every American household isn't subscribing to Netflix, except for maybe competition. ... But think about entertainment and pay television, they're pretty ubiquitous.
-- Netflix CEO Reed Hastings
Even though domestic subscriber growth slowed to a crawl in Q2, Netflix CEO Reed Hastings is sticking to his forecast that the company will eventually have 60 million-90 million domestic subscribers. (For comparison, Netflix ended last quarter with 47.1 million domestic subscribers.)
Netflix expects to keep growing for years in the U.S. Image source: The Motley Fool.
Hastings continues to believe that all TV viewing will eventually move to the internet. As a first mover in the internet TV market, Netflix is well positioned to attract a large share of TV viewing in the future. Considering that there are about 120 million households in the U.S., Netflix still has huge domestic growth opportunities ahead.
Focused on creating a high-value service in emerging markets
We thought about it after launch and debated, do we want to try to be a low cost service, like $2 service, or should we try to add content to make it a viable $10 service? And at least for the next few years, we're very much on the latter strategy.
-- Reed Hastings
The slowdown in growth also affected Netflix's international markets. Even though Netflix launched in 130 additional countries back in January, international subscriber growth was down 36% year over year in Q2.
Nevertheless, Netflix doesn't plan to change its strategy by offering a "cheap" option in emerging markets. Instead it wants to set itself apart as a premium service and improve its content to the point that many people will pay about $10/month to subscribe to Netflix.
This may seem like a tough sell in low-income countries. However, Hastings pointed to the broad global success of the iPhone as evidence that premium products can be successful in emerging markets if they are good enough.
Original content continues to work well
... [T]he growth of those original films, series, series for kids, documentaries have proven to be great investments in terms of their efficiency relative to other high profile content that we license, which is encouraging us.
-- Netflix Chief Content Officer Ted Sarandos
Original content is a critical lever that Netflix plans to use to drive subscriber growth both in the U.S. and abroad. Not only does original content help elevate Netflix's brand, it also generates more member viewing per dollar (on average). As a result, Netflix may one day allocate 50% or more of its content budget to originals, according to Chief Content Officer Ted Sarandos.
Netflix CFO David Wells pointed out that Netflix has a potential advantage over competitors due to its global scale. If it can create original content that has broad appeal across the world, Netflix will be able to spread the costs of its originals across more viewers.
Not worried about losing licensed content
Well, the relationships remain very strong, and we continue to do business with every studio, every network in every territory. They're in the business of selling their content to the highest bidder.
-- Ted Sarandos
While Netflix is increasingly emphasizing original content, it still has a huge library of licensed content. One recurring worry among investors is that Netflix's success will make it harder to keep this content, as content owners may start to worry about cannibalizing the pay-TV ecosystem.
Additionally, Comcast (CMCSA -0.79%), Walt Disney, and Twenty-First Century Fox co-own Hulu: one of Netflix's biggest internet TV rivals. In theory, they could favor Hulu in content deals, while shutting out Netflix completely.
Fortunately, Sarandos doesn't see this as a significant threat. He noted that profit participation clauses for key TV show stars essentially force the networks to take the highest offer on the table. Avoiding that issue would require a massive business model change for the big studios that they would almost certainly shy away from.
Comcast set-top box integration coming later in 2016
We're very excited about the X1 integration. It's scheduled for the second half of this year, so between now and the end of the year. And really, we're focused on getting the integration points very smooth, and the Comcast engineers are doing great work on it. So look for it later this year.
-- Reed Hastings
There's another reason to doubt that the big content owners would shut Netflix out. Earlier this month, Comcast -- the world's largest media conglomerate -- announced plans to incorporate Netflix into its highly regarded X1 set-top box. Apparently, after years of sparring with Netflix, Comcast now thinks it is smarter to work with the streaming video leader than to work against it.
After years of fighting Netflix, Comcast decided to make a deal. Image source: The Motley Fool.
Comcast will probably get some kind of referral fee when customers sign up for Netflix through the X1 box. Still, it's a risky deal, as today's new Netflix subscribers could easily become tomorrow's cord-cutters, gutting Comcast's cable TV business.
Netflix doesn't expect the upcoming X1 integration to drive a big change in its domestic growth trajectory. But Comcast's about-face implies that the media giant sees Netflix as a long-term force in the U.S. media industry. This vote of confidence from Comcast is a very good sign if you're a Netflix investor.
