Netflix (NASDAQ: NFLX) is continuing to bet big on original content as a way to draw and keep subscribers, a strategy that needs to pay off as investors become increasingly wary of its growth potential in the highly competitive SVOD market segment. But it also needs to hold the line on content costs and ARPU, especially if new users level off, according to analyst firm Jefferies, citing results of a recent survey it conducted.
Both subscribers and non-subscribers to Netflix who were surveyed by Jefferies indicated that price was a concern: current subs were more likely to cancel their service if the monthly rate went up, and non-subs cited the price as the biggest reason to not sign up for the SVOD service.
The second-highest reason for not subscribing to Netflix was a lack of interest in its original content.
Further, the licensed content in Netflix's library may be more valuable to consumers than Netflix originals, the firm said. "Surprisingly, the survey highlighted that both subscribers & non-subscribers may be more attracted to current TV / movies than NFLX originals. Only 12% of subscribing respondents indicated that a loss of interest in original content could lead to the cancellation of their subscription," Jefferies said in a research note to investors.
Netflix may also want to pay more attention to the impact of password sharing; about half of those surveyed said they would pay for their own subscription if they were no longer able to share an account. "Although we do not believe the company is currently focused on limiting password sharing, we believe this could be a longer term growth opportunity for the company," the note said.
Currently, Netflix's tiered pricing includes limits on the number of devices simultaneously streaming its service -- users are allowed one, two or four devices depending on the tier they select.
The report suggests that success for Netflix relies on continued subscriber growth, moderating the price of content, increasing average revenue per user, and on a more intangible metric: how well its original content does with viewers.
The importance of original content to its strategy was underscored by the provider's eyebrow-raising Emmy submission. Netflix submitted four boxes of screeners to Television Academy members, containing every episode of 26 eligible original series and features for them to review, Variety reported last week. (Most studios send just one box of screeners with select episodes.)
How well that submission strategy worked remains to be seen: the service landed 54 Emmy nominations for 2016, making it the most-nominated streaming service and the third most nominated media outlet -- HBO and Fox led with 94 and 56, respectively, according to The Hollywood Reporter. Its series House of Cards once again was nominated for Best Drama, while Master of None and Unbreakable Kimmy Schmidt are in the running for Best Comedy Series.
Last week, Jefferies downgraded Netflix stock from Hold to Underperform with a revised price target of $80. The analyst firm is one of about 20 firms that are rating the provider at "hold," "underweight" or "sell" according to The Wall Street Journal; another 21 still rate the stock as a "buy," a number that has held through the quarter.
Research firm BTIG, which maintained its "buy" rating on Netflix, cited similar concerns about the cost of content, international growth, and its ability to raise prices past $10 in the future, according to a Benzinga article.
For the second quarter, Netflix has forecast a half-million net U.S. subscriber additions, allowing for "moderate" churn due to the end of price grandfathering, with rates going up for longer-term subs by as much as $2 come the end of July. Internationally, the provider expects to see about 2 million new subscribers, a conservative estimate based on earlier overseas launches that saw initial signup spikes and then leveled off.
Netflix will report its second-quarter earnings on Monday, July 18 at 1:05 p.m. PDT (4:05 p.m. EDT).
- see this Benzinga article
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