Netflix plays down bubble concerns

LOS ANGELES • Netflix stunned Wall Street by attracting fewer subscribers than expected last quarter, renewing concerns that the video-streaming service has become an investment bubble.

The shares plunged as much as 15 per cent after Netflix added 5.2 million users in the period, about a million fewer than it predicted.

Its outlook for the current quarter also reflected a deceleration. The world's largest paid online television network expects to add five million customers, a slower pace than a year earlier.

Shareholders and analysts now have the job of deciding whether the slowdown is a blip or a longer-term problem.

Netflix's stock had more than doubled this year, with investors betting that the company will add tens of millions of customers around the world for years to come.

Along the way, Wall Street may have focused more on the allure of the Netflix story than the company's fundamentals, said Mr Rob Arnott, head of fund advisory firm Research Affiliates.

"They qualify as a bubble," he said on Bloomberg Television.

Netflix executives expressed little concern on a call with analysts and investors, insisting its growth over the past 12 months has still exceeded expectations.

One reason for this shortfall may be a lack of content.

Netflix released a thin slate of shows in the quarter, relative to its typical output. It did not add more seasons of its biggest hits, such as Stranger Things, nor did a new show become a phenomenon.

Ever since it released House Of Cards in 2013, it has credited new seasons of original series with luring customers. It did put out a new season of 13 Reasons Why and the Marvel series Luke Cage, as well as a breakout stand-up comedy special in Hannah Gadsby's Nanette.

Potential new customers may have also been distracted by the World Cup, a quadrennial soccer tournament that is among the mostwatched televised events in the world.

Investors value Netflix at a far higher level than other media companies of similar size because of the potential for future growth.

But the Los Gatos, California-based company hit a milestone - international customers accounted for a bigger piece of sales than domestic users.

Once primarily a service for English speakers, Netflix has ramped up its investment in shows filmed in other languages. The company debuted its first Danish and Indian dramas in the quarter and plans to release a new foreign-language programme at least once a week next year.

Producing and promoting a library of shows for a global audience has come at a high cost. Netflix has borrowed money repeatedly to pay for its programming and expects to spend between US$3 billion (S$4.1 billion) and US$4 billion more in cash than it will generate this year. Marketing expenses surpassed US$500 million in the quarter, nearly double the amount spent a year ago.

Its rise has pushed other technology and entertainment companies to invest more in online video services.

Disney is selling an Internet version of its sports network ESPN and plans to introduce a general entertainment video service next year. Apple, meanwhile, is spending more than US$1 billion on original programming.

Netflix said on Monday that it expects more competition, but dismissed any potential negative impact on its business.

"Our strategy is to simply keep improving, as we've been doing every year," it said.

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A version of this article appeared in the print edition of The Straits Times on July 18, 2018, with the headline 'Netflix plays down bubble concerns'. Print Edition | Subscribe