Netflix may soon hit U.S. subscriber ceiling… and that could limit profits

With just under 40 million subscribers in the United States, Netflix (NASDAQ: NFLX) "may be reaching the ceiling of what it can add," according to an article exploring the subscription video on demand (SVOD) provider's profit potential. Combined with ever-increasing prices for Hollywood content and stiff international competition, times could get pretty interesting for Netflix.

So says The Information's Martin Peers, who took a close look at Netflix's current value and its narrowing long-term prospects. The provider is currently "generating mediocre profits on paper but no actual cash," he wrote, as it continues its growth track.

Netflix has also committed to spend $8.9 billion over the next five years for content, he notes, with $3.9 billion of that due in the next year. With its revenues dependent on subscribers, the SVOD giant must keep growing that subscriber base to keep up with content costs. And even if its subscriber growth continues in line with projections--research firm Nomura predicts it will have 90 million subscribers globally, and 53 million U.S. subs, by 2017--Netflix will still operate at a much thinner margin, 15 percent, than HBO currently does (37 percent).

Relying on subscribers alone, in fact, could be problematic. Netflix missed forecasts in the third quarter, signing up less than 1 million new subs in the U.S. and less than 2 million internationally. It current has about 37.2 million U.S. subs, and about 15.8 million international subs, totaling around 53 million worldwide.

The company predicted it will sign up 4 million new members in the fourth quarter.

But Netflix is facing increasing competition internationally, from cable and IPTV providers that are prepared for its entry into their markets to smaller but established over-the-top services in various countries.

At home, content owners and distributors are finally moving more aggressively into the OTT space. While most will never have the reach and subscriber base of Netflix, entrants like HBO, Sony, Dish Network (NASDAQ: DISH) and CBS will try to steal eyeballs away.

What strategies will Netflix employ to keep its profit margins from dipping? It's already putting some in place: In April, the provider raised subscription rates for new subscribers by $1; it'll apply that price rise to existing subs in another year and a half. It also may be testing out the idea of new tiers of service, quietly raising the subscription rate for 4K programming to $11.99 monthly.

It is also chasing content more aggressively, inking a pact with Warner Bros. Worldwide Television to be the exclusive SVOD home of new series Gotham, ahead of the show's premiere--at a reported $1.75 million per episode. It made a similar deal with Sony TV for the NBC drama The Blacklist and its Breaking Bad sequel, Better Call Saul. That's clearly a move to draw new subscribers with a "see it here first" drive.

Some pundits have speculated, off and on for the past few years, that Netflix might offer an ad-supported version of its service to draw in more viewers and another source of revenue. But the company has never indicated it would do so.

For more:
- The Information has this story (sub. req.)

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