Image source: Netflix.
Netflix (NFLX -0.51%) investors have grown to expect an entertaining show -- and plenty of stock price volatility -- around its earnings releases. Next week should be no exception as the streaming video giant announces second-quarter figures after the market closes on Monday, July 18.
Shares are down since the last quarterly check-in revealed record subscriber growth along with declining earnings and a spike in content liabilities. Given these mixed trends, here are a few major questions that next week's results should start to answer for investors.
Are subscribers willing to pay up for better content?
As new members sign up for the streaming service, Netflix produces extra cash that it uses to buy better content, which, in turn, attracts more subscribers. Repeating that virtuous cycle is management's basic growth strategy. Yet a core assumption of that approach is that most customers value higher-quality content enough to pay up for it.
CEO Reed Hastings. Image source: Netflix.
That premise has just been put to a rare test as millions of U.S. subscribers saw their monthly bills rise over the last few weeks, forcing them to reevaluate their relationship with the company.
There's no question that Netflix's content portfolio has improved dramatically in the last few years as the company added hundreds of hours of exclusive and original shows along with a few high-budget movies. But if a significant portion of the subscriber base doesn't value the upgrades enough to kick in an extra $1 or $2 per month, then Netflix might need to rethink its expensive content plans.
How fast can you grow internationally?
Netflix forecast its first-ever decline in international subscriber gains this quarter and sees adding just 2 million members, compared to 2.4 million in the year-ago period. That drop is due to an unusually strong launch in the Australia and New Zealand markets last year, executives said. Absent the effect of the regional bump, international markets would be growing at an increasing pace in Q2.
There's a lot that Netflix doesn't know about the 130 new markets it just entered, including how the brand will be received over time, what the right mix of local content should be, and whether English-language entertainment has a broad enough appeal to attract tons of subscribers.
Netflix is quickly approaching the point where over half of its user base is outside the United States. Hastings hasn't named a target for the long-term mix of international and domestic members, but has pointed to companies like Facebook that have an 80-20 split. It will be interesting to see how the streaming giant's recent global experience has informed management's thinking on its growth prospects.
What's the next step for your partnerships?
Partnerships have always been critical to Netflix's business, beginning with the gaming console devices that brought its streaming app into millions of homes in 2012. Hastings just extended that approach in a big way by reaching a deal with cable giant Comcast (CMCSA 1.62%) to put its app in the X1 set-top platform. Netflix gets a source of new subscribers who can easily sign up for its service, while Comcast gets another selling point to convince customers to upgrade to its faster cable offering.
Another huge partnership ramps up in just a few months, when Disney (DIS -0.45%) movies hit Netflix's U.S. servers beginning in September. Hastings should have more to say on this deal in terms of whether executives believe it will boost subscriber numbers. There's also the question of how much it will hurt the bottom line as those first-run animated and live-action films start rolling onto the service next quarter.
Plenty has changed in the three years since Disney and Netflix struck this agreement. The House of Mouse's media business, for example, is under stress as ESPN subscriber numbers decline. Hastings should have a better feel for how the economics will play out for Netflix now that we're so close to launch.
