Netflix subscriber growth continues to slow, with entry into mobile gaming confirmed

Netflix Inc (NASDAQ:NFLX) shares are expected to fall later today after it revealed that subscriber growth is slowing, even going into reverse in North America. The online video streaming service added around 1.5mln of new paid subscribers in the second quarter of 2021, which was more than expected but well down on the 4mln net additions in the first and 10.1mln in the second quarter last year. Netflix, which at the end of June boasted a total of 209.2mln global paid subscriptions, up 8.4% on last year, said it expects a further fall in net additions for the third quarter. There was a decline in paid memberships in North America, which was blamed on the “large membership base” – in other words the streaming market is saturated with Netflix up against Disney+, Amazon Prime, Hulu and others – and it being a “seasonally smaller quarter for acquisition”. Growth in subscribers and a 4% rise in average revenue per member (ARM) led to group revenue climbing 19.4% to US$7.3bn, with North America up 9%, Europe, Middle East & Africa and Latin America both up 2%, and Asia Pacific up 1%. Operating profit jumped 36% to US$1.8bn as margins were lifted 3.1 percentage points to 25.2%. Adding more detail on its mooted move into the “new content category” of video games, Netflix said it will initially focus on mobile games and will include them in subscriptions at no additional cost, for now. "We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV," the company said, saying the move builds on its earlier efforts around interactivity such as with Black Mirror Bandersnatch and Stranger Things games. So far this year generating its own TV series and films has used US$8bn of cash as shooting has restarted after pandemic shut-downs. Net debt ended the quarter at US$7.8bn after free cash outflow of US$175mln, compared to the $899mln inflow a year ago when production was shut down due to the coronavirus, but management expects to be free cashflow neutral for the full year. “Netflix’s significance to modern living cannot be overstated, and that is to be applauded. However, the group is its own worst enemy in some respects,” said analyst Sophie Lund-Yates at Hargreaves Lansdown. “Its enormous growth over the years means it needs to work hard now to stay relevant and not let rivals take its market-leader crown.” Competition from the likes of Disney and Amazon.com’s Prime Service is the biggest threat to the Netflix investment case, Lund-Yates says. “It’s reasonable to think the average customer will happily pay for two streaming subscriptions, like Netflix and Prime. The water’s being muddied by the unstoppable rise of Disney+ and its wider family including Hulu though. “Murmurings of rising inflation could also add pressure to this situation – if the customer base feels like their spending power’s being diminished, they will be even more discerning about the luxuries they’re willing, or able, to shell out on. That’s something to watch out for given the slowdown in growth in the group’s most important region of North America and Canada.”    The entry into gaming could be significant as the company needs to diversify its business, said analyst Paolo Pescatore at PP Foresight. “Whether Netflix likes it or not, the company must pivot towards being a platform. It cannot solely rely on subscription video streaming while others offer a slew of services. Having a base of more than 209 million paying subscribers is effectively a shop window. There are plentiful opportunities to offer other features, services and billing options.” Looking at the slower subscriber growth, he said the second is typically Netflix's most challenging quarter due to seasonality, more so this year with intense competition, bumper summer of live sport and restrictions easing up. “Worryingly, the company expects another quarter of lower net adds compared to the prior year. This despite a strong slate of new shows. “As the competitive landscape continues to intensify, Netflix must retain existing subs, drive engagement and invest in new features. “Battle for content will be key in this race for supremacy in a post pandemic streaming watch party.”