Netflix price hike to slow subscriber growth in third quarter

netflix q3 subscriber mix

In its letter to shareholders (PDF), Netflix gave some expectations for how its pricing change and expansion into new markets will affect its growth over the coming quarters. The good news? It expects growth in international markets to ramp up in the second half. The bad news? Growth in the U.S. will largely be flat this quarter as it works through the impact of its pricing change.

Impact of the pricing change

About 75 percent of all new subscribers sign up for the streaming-only plan, which is likely one reason why Netflix felt comfortable changing its pricing plans to begin with. At the same time, the company acknowledged that many subscribers — especially those who used both streaming and DVD, were unhappy with the change.

“We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we’re working hard to further improve the quality and range of our streaming content in Q4 and beyond,” it said in its note to shareholders.

Which plans will subscribers join?

Netflix therefore expects total net additions in the third quarter to be lower due to the pricing change, with revenues only growing slightly during the quarter. Those revenues will once again begin to ramp up in the fourth quarter, as the typically strong holiday season helps drive new net additions during the quarter. As a result, Netflix expects the fourth quarter could be its first-ever $1 billion quarter.

Netflix expects to have about 25 million subscribers by the end of the third quarter, with approximately 12 million subscribing to both the DVD and the streaming service services at the higher $15.98 price plan. It expects 10 million subscribers to go streaming only and just 3 million to rely solely on DVDs.

Breaking out financials

As we expected, the fourth quarter will also finally bring a separation in the costs of operations and revenue benefit of both its DVD and streaming services in the domestic market. That will give financial analysts a better view into how each part of the business — domestic DVD, domestic streaming and international — are performing. The company is also adding the “contribution profit” metric to its financial results to help analysts understand how each segment is contributing to overall company growth.

Beyond Latin America

While Netflix still had few details to share over exactly when its Latin America expansion would happen, it did give some insight into its plans for a third international market. That expansion will happen in the first quarter and Netflix acknowledged that it could even mean launching in multiple markets. That fits with rumors that have it launching in the U.K. and Spain early next year. As a result, it’s also increasing its forecast for operating losses in its international business, which will grow from $70 million in the second half to $80 million and include pre-launch expenses for the “one or more countries” it may launch in in the first quarter of next year.

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