Netflix subscribers who were grandfathered into the company’s price increase two years ago at $7.99 per month are about to see their monthly subscription price go up, and analysts have been attempting to gauge how much this will increase the company’s churn rate. The good news though is that new subscriber growth has remained strong despite not one but two price increases over the last couple of years, and analysts don’t seem too worried.
Netflix planning huge slate of launches
Cantor Fitzgerald analyst Youssef Squali and team note that Netflix has a strong slate of original content planned for release in the second quarter. The timing of the releases is apt, as they also pointed out that typically original content launches have a high correlation with domestic subscriber growth.
They compared Netflix’s original launches in the first and second quarters of this year and the second quarter of last year. They estimate the second quarter slate to be about 13% larger than that of the first quarter at 17 notable launches in the June quarter against the first quarter’s 15 launches. They add that this year’s second quarter is about 42% larger than the year-ago quarter when the company released 12 new originals.
Further, they said so far this year, reviews have been a solid indicator of comparable ratings and quality as the average rating of the second quarter titles that have been released so far is 61.3, compared to the first quarter’s total rating of 61.2. They used data from Metacritic and IMDb to come up with these ratings.
Subscriber growth correlated with original releases
The Cantor Fitzgerald team also explained the correlation they found between original launches and domestic subscriber growth. They’ve been tracking original releases and matching it with subscriber growth since the first quarter of 2013 and have found usually a positive correlation between them. Of course this means that Netflix should post strong domestic growth in the second quarter because of the strong originals content slate.
They add that the subscribers who were grandfathered in with their old subscription price of $7.99 per month will likely pose a headwind to the company’s second quarter net adds. However, they believe management has been doing all they can to limit the churn rate due to this factor by being “ultra-sensitive with its communication with users. They also said that over 50% of U.S. subscribers pay less than the current $9.99 per month for the two-screen HD plan but first quarter domestic growth was better than expected, coming in at 2.2 million adds, against the guidance for 1.75 million.
Original shows, Disney boost Netflix’s subscriber base
The Cantor Fitzgerald team credits Netflix’s original series for this outperformance, especially the shows Fuller House and Making a Murderer, which were very well-received. They also point out that management guided for only 500,000 domestic adds in the second quarter, versus the 900,000 subscribers the company added in last year’s second quarter.
They’re also looking forward to the beginning of the movie deal with Walt Disney, which was signed in December 2012. The deal grants the streaming TV provider exclusive rights to stream Disney’s theatrical releases in the U.S. pay TV window starting in September or about six months after they debut at the box office. At the time of the announcement, the deal was valued at about $300 million per year. The Cantor Fitzgerald team expects this deal to also boost Netflix’s second quarter numbers as U.S. consumers subscribe just before it launches.
Shares of Netflix edged lower by 0.65% to $102.63 in afternoon trading on Tuesday.
