Internet TV giant Netflix (NASDAQ:NFLX) had a bumper fourth quarter. The company added a whopping 8.3 million streaming subscribers, with 1.98 million coming from the U.S., and 6.36 million coming from international markets. That's 18% more subscribers than Netflix added during the fourth quarter of 2016.

These new subscribers didn't come cheap. Netflix ramped up its marketing spending during the fourth quarter to drive this growth, and the company expects to grow this spending even more during 2018. Netflix will spend $2 billion on marketing this year, up from $1.3 billion in 2017.

For Netflix investors, one thing to keep an eye on is how effectively these marketing dollars are producing new subscribers. In the fourth quarter, it was a mixed bag.

Netflix's interface showing Stranger Things.

Image source: Netflix.

A saturating U.S. market

Netflix now has 54.8 million subscribers in the U.S., a number that's approaching half of all households. There's still room to grow in its home market, and the company does expect to add another 1.45 million U.S. subscribers in its first quarter. But the closer Netflix gets to saturation, the more difficult it becomes to grow the business.

A clear sign that Netflix's job is getting tougher in the U.S. is its marketing spending. During the fourth quarter, Netflix spent $195.8 million on marketing in the U.S., an 85% increase year over year. U.S. streaming revenue grew by just 16.2% year over year, leading to a decline in contribution margin for the U.S. streaming business.

That marketing spending produced 1.98 million new U.S. streaming subscribers, at a cost of $98.90 per subscriber. Netflix gained almost the same number of subscribers in the prior-year period, but at a much lower cost. Here's how Netflix's trailing-12-month U.S. subscriber acquisition cost has evolved over time:

A chart showing Netflix's trailing-twelve-month U.S. customer acquisition cost.

Chart by author. Data source: Netflix.

Netflix spent more than $100 to acquire each new U.S. subscriber over the past year. That's equivalent to about nine months on the standard $10.99 plan. The spending per subscriber has just about doubled since the beginning of 2016.

No problems overseas

Netflix's international business is a different story. Netflix has been able to hold the cost of subscriber acquisition steady over the past few years, and that trend didn't change in the fourth quarter. International marketing spending was $224.2 million, up 25% year over year. Revenue grew at a faster 63.6% rate.

Each of Netflix's 6.36 million new international subscribers during the fourth quarter cost just $35.30 to acquire via marketing spending. The trailing-12-month international subscriber acquisition cost has remained roughly flat, a sign that Netflix has room to pour more marketing dollars into international markets.

A chart showing Netflix's trailing-twelve-month international customer acquisition cost.

Chart by author. Data source: Netflix.

Much of Netflix's increase in 2018 marketing spending will likely go toward growing the international business, given that's there's no sign of saturation.

One thing to watch this year

Netflix expects its total marketing spending in 2018 to grow faster than revenue. The U.S. is probably the main reason for that, with the cost of adding each new subscriber increasing.

The big question is how much more marketing spending Netflix can pour into international markets before each additional dollar becomes less effective in creating new subscribers. It clearly hasn't reached that point yet.

Netflix's growth in 2017 was impressive, but it's really just a function of how much cash the company is willing to hurl into marketing. Total revenue increased by 32.4% in 2017, while total marketing spending increased by 28.9%. Those numbers will switch positions in 2018 as marketing spending ramps up.

This spending, along with continued investments in content, will drive free cash flow even deeper into the red. Netflix expects a free-cash-flow loss of between $3 billion and $4 billion in 2018, which will cause its debt load to rise even further. That's a staggering amount of money being thrown into growth, and it will likely take many years before cash starts moving in the right direction.

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