Netflix (NASDAQ:NFLX) is due to report fourth-quarter earnings Tuesday afternoon, and investors will be watching closely to see how the streaming giant fared against both Disney+ and Apple+.
All eyes will be on the company's subscriber growth, especially in North America; it's most important market -- and the one where it's being most directly challenged by new entrants -- which will soon include AT&T's HBOMax and Comcast's Peacock. For the quarter, Netflix guided to just 600,000 domestic subscriber additions, down nearly 1 million from the quarter a year ago, which seems to be an admission of slowdown against the backdrop of the launch of streaming services by Disney and Apple.
While subscriber growth is certainly important, there's another data point I'll be keeping an eye on in Netflix's earnings report: average selling price (ASP).
Not all subscribers are created equal
The market studies Netflix's subscriber growth carefully, but forgets that it has three distinct tiers of domestic subscribers, paying either $8.99, $12.99, or $15.99 a month. At the low end, subscribers get Netflix on one screen at a time and standard-definition viewing. The $12.99 package comes with two screens at a time and high definition, while $15.99 gets four screens and 4K ultra high definition.
Most subscribers choose the standard $12.99 membership, but Netflix premium subscribers are nearly twice as valuable as basic subscribers, meaning the type of subscriber makes a big difference on the bottom line.
Netflix last raised its domestic prices in January 2019, rolling out the hike over the following few months. The chart below shows its average selling price over the last five quarters, according to Netflix's fourth-quarter forecast.
|Q3 2018||Q4 2018||Q1 2019||Q2 2019||Q3 2019||Q4 2019 Forecast|
|Average U.S. selling price per month||$11.44||$11.52||$11.65||$12.74||$13.33||$13.43|
As you can see, there's been a consistent upward trajectory in Netflix's ASP, which accelerated over the second and third quarter as Netflix implemented its price increase. But the threat from Disney+ and other new rivals leaves this question open: Which of Netflix's subscribers are most likely to leave the service?
Since Disney, Apple, and the upcoming Peacock are all cheaper than Netflix, its lower-paying subscribers would seem to be most at risk of fleeing the service; higher-paying subscribers probably spend more time on Netflix and are less likely to be swayed by competitors' offers. That means that Netflix could see a higher-than-expected jump in average selling price this quarter. Though Netflix wants to retain and add as many subscribers as possible, it's most important that subscriber growth skew toward higher-paying members like those who sign up for the Premium package.
A $0.10 difference in ASP may not seem important, but that's the equivalent of 500,000 new subscribers. Netflix's ability to grow its ASP will also influence the timing of its next price increase, since the more willing its subscriber base is to pay up for the service, the more confident the company will be about raising prices down the road.
Subscriber growth will be the most important number coming out in Netflix's fourth-quarter earnings report, but investors should also watch for average selling price. If Netflix beats its own estimates in both categories, the company will have successfully passed its first challenge from the new round of competition, which will reassure investors and likely lift the stock price.