Netflix (NFLX -0.01%) is on pace for its slowest six months of streaming subscriber growth in its history.

The streaming pioneer added only 4 million subscribers globally in the first quarter, and forecast just another 1 million new customers in the second quarter. Management blamed volatility from the COVID-19 pandemic, noting the dramatic pull-forward effect of the global health crisis, which led to 26 million new streaming members in the first half of 2020. 

However, for Netflix bears the results only add fuel to the argument that competition is sapping the company's growth. Netflix has faced a wave of new competitors over the last year, with several legacy media companies launching their own streaming services. On the earnings call CEO Reed Hastings deflected those concerns, saying that the company didn't see a meaningful impact from new competition, as subscriber growth was sluggish globally. There weren't patterns in specific markets that you'd expect to see if competition was the culprit.

Netflix has long downplayed competition concerns, insisting that it competes against a wide range of alternatives, including video games and social media. But one tidbit in its shareholder letter shed some light on how it thinks about competition.

A mural featuring Netflix characters

Image source: Netflix.

More than a subscriber race

Disney (DIS -2.79%) stock has surged since the depths of the pandemic largely because of the skyrocketing growth of Disney+, which has racked up more than 100 million subscribers in less than 18 months.

In what seemed to be a veiled comment about Disney and other streaming debutantes, Netflix said in its shareholder letter, "When comparing services, subscriber figures alone tell only part of the story (given bundles, discounts and other promotions) so it's important to also focus on engagement and revenue as key indicators of success; they drive the flywheel of investment in even more amazing stories for our members and future growth."

Indeed, the growth of Disney+ has come with a big assist from promotions, including a free year through telecoms like Verizon, a $14/month bundle with Hulu (with ads) and ESPN+ -- the same price as the standard Netflix package -- and a boost in subscriptions in India and Indonesia from adding Disney+ to Hotstar subscriptions. 

Disney is emerging as Netflix's strongest global streaming competitor, and some analysts are already predicting that Disney+ will surpass Netflix in global subscriptions in the not-too-distant future. However, Netflix management makes a good point. Disney+ had an average revenue per user of just $4.03 in its most recent quarter, which is barely a third of Netflix's ARPU at $11.50, meaning its total revenue is nearly six times that of Disney+.

In terms of engagement, Netflix has also established itself as a leader in viewing hours. In 2019, the company said that its average viewer watched two hours of content daily, and that number spiked to an estimated 3.2 hours during the height of the lockdowns.  

A HarrisX poll last October showed 43% of Netflix viewers said they use the service daily, while only 26% of Disney+ users said the same. Netflix has also historically had a lower churn rate than its competitors, a reflection of the size of its content library and the frequency of its new releases.

Competition still matters

It's important for investors to keep an eye on competitors, and management is clearly doing that. However, Netflix still has a significant growth opportunity in international markets, and will benefit from the broader shift from linear TV to streaming. 

Netflix believes its subscriber growth is slowing substantially now in part because its new releases have been delayed by the pandemic. Those delays helped drive a doubling in operating income to $1.96 billion, but investors overlooked that because of the subscriber miss. In the second half of the year, management sees subscriber growth accelerating as a number of high-profile movies and TV series hit the service.

Even as subscriber growth slowed, Netflix still said its churn was lower than a year ago, showing that its subscribers are remaining loyal to the service. That's a sign that the growth headwinds in the first half of this year may just be temporary. The streaming company is still well ahead of Disney and its other new competitors in the metrics that matter most, and it's planning on spending a record $17 billion on content this year. That should keep audiences coming back, and competitors at bay.