Netflix’s 3Q results reflect that while original content will continue to drive take-up, competitive pressure is increasing with new entrants (telcos and broadcasters) emerging. The recent price hikes demonstrate Netflix’s pricing power which should help finance its investment in new genres and local content.

Event – Netflix 3Q: US subs below expectations: Netflix announced its 3Q results with disappointing US subscriber net adds at 0.9m (expected 1.1m) while overall subs growth was in line boosted by a better than expected international subs growth at 2.7m (expected 2.4m). Netflix reported 3.62m subscriber additions in line with consensus (and guidance) estimates of 3.55m. Netflix ended 3Q with more than 69m subscribers comprising 43m US subscribers and 26m international subscribers. Management indicated that lower than expected US subs growth was driven by an ongoing transition to chip-based cards in the US which means many subscribers need to update their user accounts with the new card details so that Netflix can charge their accounts every month, a trend which may continue into 4Q. Could the drop in US net adds also be attributable to international users accessing Netflix through VPN switching to the local Netflix offerings as Netflix expands internationally? Netflix guided for 1.65m US and 3.5m international subscriber additions for 4Q along with launches in Spain, Portugal and Italy scheduled for 4Q and South Korea, Hong Kong, Taiwan and Singapore in early 2016.

Subs growth driven by international subs: While Netflix doesn’t break out the individual markets, the management commentary highlighted the strong growth seen in Brazil and the initial traction from the Japanese launch in 3Q. International net adds at 2.7m subs exceeded expectations (and guidance) of 2.4m subs. Given that Japan was the only new market launch for Netflix in 3Q and the earnings commentary from 2Q, where the management indicated that they expected a slow start from the Japanese launch, we believe Australia and New Zealand were significant contributors to the strong international net adds in 3Q. Recent research suggests that Netflix has ~1m paid subs in Australia with 1 in 10 homes having a subscription. This reflects our belief that adoption will be driven by strong pent-up demand for SVOD services, high brand awareness, high cost of content in Australia and the delay in the launch of SVOD services relative to other markets (See our report ‘SVOD Market Outlook’ for further detail).