Netflix (NFLX 3.41%) passed a big test with its fourth-quarter earnings report last week. The company is confronting more intense competition, most notably from Walt Disney and Apple. In the United States, where the effects of new competing services were felt most keenly, the number of Netflix subscribers grew 420,000 in the fourth quarter.
Combining the U.S. and Canada, there were 550,000 additions in the quarter . This is lower than the 1.75 million new subscribers in the year-ago period, and management placed part of the blame on the increased competition (along with price increases). Nonetheless, it is noteworthy that there was subscriber growth in the U.S. and Canada.
The subscription growth comes after the heralded Disney+ came to market in November , with its wide-ranging Disney content (including Pixar, Marvel, and Star Wars franchises) for $6.99 per month or a combined Disney+, ESPN, and Hulu subscription price of $12.99 .This is competitive with Netflix's three plans, which range from $8.99 to $15.99 per month. Apple TV+ was also launched in November at an introductory $4.99 monthly rate.
Netflix is used to confronting competition. Amazon.com's Prime membership plan comes with a streaming service and Hulu launched in 2008, prior to Disney taking full control last year. That's not even mentioning the traditional cable companies that were entrenched before Netflix and others came upon the scene.
Granted, things are intensifying in the sector, with more streaming services planned, such as NBCUniversal's Peacock and HBO Max. Netflix has shown it can compete, but my faith in the future is more than merely relying on management's track record. There are a couple of factors working in its favor.
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Joining with cable companies
Netflix has formed partnerships with wireless companies and cable companies, which would seem to be competitors. For example, T-Mobile gives Netflix subscriptions to some of its customers for no extra cost while Comcast gives its customers a convenient way to buy a Netflix subscription.
Although the number of subscribers added due to these arrangements is not available, Netflix's partnerships with cable companies are creating a win-win situation. The streaming service gets viewed in more households while allowing cable companies, which are worried about cord-cutting, to retain subscribers.
It's true that other streaming services, such as Amazon Prime, have linked with cable companies. By itself, expanded distribution, while nice, is not enough to keep Netflix's paying subscribers growing.
There's more to what Netflix is doing, though.
Competing with original content
The second part of this growth narrative is Netflix's constant flow of original programming that appeals to a wide range of people. For instance, in the first quarter, Netflix plans to release To All the Boys: P.S. I Still Love You, the second in a trilogy of teen romance movies, the docuseries Killer Inside: The Mind of Aaron Hernandez, and season 3 of the Spanish teen drama Elite.
It is not just producing content to merely fill the void, either. Rather, it is generating high-quality, award-winning programs that draw subscribers.
Netflix noted in its fourth-quarter press release, "The exceptional breadth and quality of our film slate was recognized as we led all studios with 24 Academy Award nominations across eight different films." Strong original programming is the key to drawing audiences to its service.
The owned content is also stable, an important consideration in retaining subscribers. Licensing deals are fraught with peril. For instance, Netflix lost the popular Friends sitcom this year, which is moving to the soon-to-be-launched HBO Max. Obviously, the company does not have to worry about this happening with its original programming.
Netflix's content strategy has served it well. Globally, the company added 8.8 million paying streaming subscribers in the fourth quarter from the third quarter, to 167.1 million. In 2019, its revenue grew 31% versus a year ago, to $20.1 billion. Operating income increased by 62%, to $2.6 billion.
Constantly evolving
In an ever-changing world, management has shown a proclivity to keep evolving and adapting. Founded in 1997 , the original model was renting DVDs by mail to compete with video rental stores. The company started streaming content in 2007 and expanded the service internationally three years later. Then, it moved into original content in 2013.
Right now, quality content and distribution agreements make Netflix a compelling company. I wouldn't bet against the company's constant forward-looking approach.
