Netflix U.S. subscriber numbers disappoint, as it takes on the world

Binging on Netflix may be losing some of its appeal in the U.S., even as the addiction rapidly spreads to other parts of the world.
Wagner Moura plays drug lord Pablo Escobar, in the Netflix Original Series Narcos, one of several original series that is pushing up production costs for the video-streaming service. (Netflix/Associated Press)

Binging on Netflix may be losing some of its appeal in the U.S., even as the addiction rapidly spreads to other parts of the world.

The Internet video service added 3.62 million subscribers during the three months ended September, it announced Wednesday as part of its third-quarter earnings. That's slightly more than the company had predicted.

But Netflix didn't gain as many U.S. subscribers during the latest quarter as management anticipated, a shortfall that it blamed on an unusually large number of accounts cancelled because the company couldn't charge their credit cards. The company believes the trouble is tied to a large number of new credit-card account numbers banks are issuing as they adopt card technology based on computer chips instead of magnetic stripes.

In the third quarter, Netflix gained just 880,000 subscribers in the U.S., below the 1.15 million customers that the company had predicted. It was also fewer than the 980,000 U.S. subscribers that the service added this time last year. Netflix has picked up 16 million more subscribers during the past year alone, leaving the service with 69 million worldwide customers as of September.

Lots of competition

Disappointing growth in the U.S. appeared to raise fears that Netflix may be having trouble attracting more subscribers in its biggest market. It's facing tougher Internet-video competition from, Hulu and an online-only application from pay-TV provider HBO.

"We're all racing to fulfil consumer desires," Netflix CEO Reed Hastings wrote in a letter accompanying the third-quarter results.

Netflix's stock shed 7.5 per cent, to $102 US in extended trading after the numbers came out. Even with that drop, the shares have still more than doubled so far this year.

Nearly two-thirds of Netflix's subscribers, 43 million accounts, are located in the U.S. But the streaming service is turning into a global phenomenon; Netflix is pushing to offer its service in 200 countries by the end of next year.

Netflix is currently available in about 80 nations, meaning it will have to launch its service in an average of about eight more countries each month to meet its deadline. The service will start streaming in Spain, Italy and Portugal before the end of this year and then go into South Korea, Hong Kong, Taiwan and Singapore early next year.

Many of the countries located in Asia and Africa are likely to be more challenging to navigate than the mostly European and Latin American countries that Netflix has already entered.

Rapid growth in international subscribers

The Los Gatos, California, company currently has 26 million subscribers outside the U.S., a 64 per cent increase from the same time last year when it was in fewer countries.

The international push is costing Netflix hundreds of millions of dollars, although the company has remained profitable. Netflix earned $29.4 million in its latest quarter, a 50 per cent drop from the same time last year. 

Netflix's profit margins are also being squeezed as it pours more money into original programming such as the Orange Is The New Black, which can only been seen on its service initially. In the latest quarter, Netflix lured viewers with a series called Narcos and on Friday will debut a critically acclaimed movie called Beasts of Nation that is also being shown in theatres.

Although the original programs have been a key factor in Netflix's recent success, the licensing bills are starting to take a toll. Netflix's programming costs are expected to rise from $3 billion this year to about $5 billion next year, with even more increases expected in subsequent years.

To help cover its expenses, Netflix last week announced it's raising the price of its most popular video plan by a dollar to $10 per month. Netflix has insulated its current subscribers by guaranteed their rates will remain unchanged until October 2015.


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