GSMA Intelligence
Netflix results: the latest episode in a competitive content ecosystem
Analysis
Forecast miss is not the end of the world
In Q2 2018, Netflix added 5.2 million members globally –
lower than the company’s projection of 6.2 million. Half
the gap was due to slower growth in the US, while the
international business accounted for the remainder. This is the
largest miss over the last 10 quarters for Netflix, but it is not
the end of the success story. Looking at the last 12 months,
customer net additions are still solid at over 26 million.
Source: Netflix and Thomson Reuters
Netflix memberships and market cap
80
Number of memberships (million)
70
60
50
40
30
20
10
0 0
2011 2012 2013 2014
US International
*For March and June 2018: rolling 12-month net additions
Netflix cannot afford net additions to slow – yet
The worrying result is that rolling 12-month net additions did
not grow, after many years of doing so. It would be premature
for a company that has a large addressable market worldwide
to allow these to slow. Its business model largely relies on
continuous subscriber growth, especially in the context of
increasing spend on content. It is no coincidence that Netflix’s
market cap has been highly correlated to subscriber growth
over the last few years. With the US at 57 million subscribers
as of June 2018, future net additions will increasingly need to
come from international markets, and accelerate.
Replacing traditional pay-TV takes time
So far, Netflix has been a complement to traditional pay-
TV in most markets. The US is an exception; the market has
recently shown early signs of substitution affecting mostly
cable and satellite providers – but the cord cutting took time.
Looking forward, if we apply current rates of Netflix customer
additions and traditional pay-TV losses, the number of Netflix
subscribers will overtake that of the top five traditional pay-TV
providers in the US in 2022. This would still leave room for
growth, as Netflix penetration of US households would be just
over 50%.
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INSIGHT SPOTLIGHT
Context
The media and entertainment sector is increasingly
capturing attention worldwide, with developments
and announcements gathering pace. M&A involving
media companies recorded a historic high in the
first half of 2018, largely driven by mega corporate
deals in the US, while investment in original content
continues to grow, spurring competition.
Netflix missing its quarterly subscriber forecast
was unexpected news for the industry. We took its
results – announced on 16 July – as an opportunity
180 to comment on its likely future in a fast-evolving
160 Market cap ($ billion) and increasingly competitive content ecosystem.
140
Traditional pay-TV providers in Europe could be disrupted
120
given high penetration rates of pay TV and high proportions
100 of price-sensitive consumers. In the UK, a recent Ofcom
report found that 36% of subscription video on-demand
80
(SVoD) customers dropped a premium aspect of their pay-
60 TV service (cord shaving) while 14% stopped paying for it
altogether (cord cutting).
40
20 B2B2C is key to expanding addressable market
Partnerships with service providers such as telecoms
2015 2016 2017 Mar-18 Jun-18
operators and satellite & cable companies have been a
Global net adds* Market cap constant for Netflix in recent years. Notable examples in
2018 include Sky in Europe, KDDI in Japan and Telefónica
across Europe and Latin America. While B2C generates
the majority of its customer acquisitions, partnerships are
an additional, high-performing acquisition channel. Having
Netflix services integrated into traditional pay-TV and video
platforms helps expand its addressable market by leveraging
the established customer relationships, technology equipment
and distribution channels of these companies.
Spend on original content is becoming the norm
Netflix has been increasing its content budget by $1 billion
each year, reaching $8 billion in 2018. This accounts for more
than half the company’s revenue in 2018. Excluding the two
largest media powerhouses in the world by market cap (Walt
Disney and Comcast), it is the highest spend in the industry.
Amazon spends around $5 billion, whereas Apple and
Facebook are targeting $1 billion.
Licensed content is still the major source of Netflix’s
libraries (the aggregation model). However, an increasing
share of new spend will go towards original content,
including production of non-English originals in big markets
such as Brazil and India. Original content helps Netflix
attract new users. In the UK, for example, nearly 40% of
Netflix subscribers cited original series as a reason for
signing up (source: Ofcom).
www.gsmaintelligence.com
 Netflix results: the latest episode in a competitive content ecosystem

Implications
Content players
• Established content producers
such as Walt Disney (in the process
of acquiring 21st Century Fox),
NBCUniversal (owned by Comcast)
and Time Warner (acquired by
AT&T) face growing competition
from media and non-media
companies. Netflix and Amazon are
the key challengers as they tap into
content production.
• Growing demand for content
production makes content more
expensive. As some content
aggregators also become
producers, the future of content
licensing is likely to change in
terms of agreements for exclusivity,
distribution and pricing.
• Consumers like original content.
But a scenario where several
companies offer exclusive content
may not be realistic, given that
customers would need to subscribe
to different providers. Content
licensing and aggregation will
continue to be the most common
model for major providers of
content to end users.
• Ultimately, the content play
represents a different means for
different companies. Amazon,
Apple, Facebook and Google are
digital platform conglomerates
investing small percentages of their
huge financial resources in content
as part of larger propositions and
subscriptions, or to support their
core businesses. Entertainment-only
companies are more susceptible to
any effects a changing competitive
landscape has on costs and
business models.
Satellite and cable companies
• SVoD services are disrupting
all three traditional pay-TV
technologies (satellite, cable
and IPTV). However, should cord
cutting start to gather momentum
across markets, satellite is likely to
be more susceptible to disruption
due to its smaller presence in
the connectivity business, which
provides fewer opportunities for
bundling with home broadband
(and potentially mobile).
Telecoms operators
• The increase in competition for
content production is unlikely
to have major implications for
operators. Today, pay-TV is a
service (not content) play for most
operators around the world, largely
bundled with fixed broadband, and
with mobile (quadruple play) in a
small number of European countries.
• IPTV – delivered through FTTH,
FTTB or VDSL – is the most
common technology approach,
though some operators have
been acquiring satellite and
cable companies over the last
five years to complement their
IPTV capabilities. Some have also
launched their own OTT streaming
services. Whether traditional pay-
TV or OTT, content aggregation and
distribution – rather than content
production – will likely continue to
be the prevalent business model for
most operators.
• OTT players are a major threat
to traditional pay-TV companies.
However, to fully replace traditional
pay-TV, OTT players will need to
provide a comprehensive service.
Exclusive sports content is a key
customer requirement in many
countries, and several traditional pay-
TV houses are able to fulfil this need.
Sports is not currently part of Netflix’s
content strategy, while Amazon has
made minor sports plays.
• Few operators have a content play
beyond aggregation. The AT&T case
is unique in business model and
scale given the company’s presence
throughout the entire media value
chain and the size of its media and
entertainment business. Telefónica
is also betting on original content
productions in Latin America as a
differentiating element for its fixed,
pay-TV and mobile customers,
though this is a small-scale
investment. Acquiring exclusive
content such as sports rights is also
confined to a few operators.
• A scenario where SVoD net additions
slow significantly could accelerate
the rate of partnerships between
content producers and telecoms
operators, which have the distribution
and customer relationships. From a
customer perspective, embedding
Netflix into a fixed-TV or quad-
play package reduces billing and
equipment complexity and helps
provide an integrated and seamless
customer experience.

Related reading
Vodafone and Liberty: playing the long game Disruption of the video ecosystem
gsmaintelligence.com/research/2018/05/vodafone-and- (in Global Mobile Radar, May 2017)
liberty-playing-the-long-game/669/ gsmaintelligence.com/research/2017/05/global-mobile-radar/623/

FMC in Spain – six takeaways five years on How video ate the digital world
gsmaintelligence.com/research/2018/06/fmc-in-spain-six- (In Global Mobile Radar, February 2017)
takeaways-five-years-on/674/ gsmaintelligence.com/research/2017/02/global-mobile-radar/599/

@GSMAi   Author Pablo Iacopino, Director of Ecosystem Research piacopino@gsma.com www.gsmaintelligence.com