Netflix’s growth came down to earth in the third quarter after a spectacular first-half performance. The company revealed how it would keep growth going and maintain its number one position for new content discovery.
Netflix third-quarter performance
In a normal year, the second quarter is typically Netflix’s weakest quarter for growth, and the first quarter is the strongest. However, 2020 is anything but normal. The pandemic seems to have encouraged people that might have signed up later in the year to join sooner. The first-quarter growth was extraordinary, delivering 15.8 million new paying customers compared to 9.6 million last year. The second quarter was also exceptional, adding 10.1 million to the subscriber rolls versus 2.7 million in 2019.
In the third quarter, growth slowed dramatically. The company added 2.2 million new customers, versus 6.8 million in Q3 2019. However, it looks like many Q3 and Q4 signups were brought forward into the first half due to stay-at-home orders. For the year so far, Netflix has already outstripped 2019 growth, adding 28.1 million subscribers in the first three quarters versus 19.1 million for the whole of 2019.
Netflix is forecasting an additional 6 million new customers in the fourth quarter, compared to 8.8 million in Q4 2019. Do not be surprised if the company comes up a little short of that total as the pandemic’s effects continue to unwind.
Sustaining growth without a free trial
Earlier this month, Netflix stopped offering North American consumers a free trial of the service. Disney+ has also stopped offering a free trial. Unfortunately, it is an incredibly effective tool in delivering new subscribers, with up to 7-in-10 free-trialers going on to become paying customers. How will Netflix continue to recruit customers without a free trial? The company plans to go back to the future.
A common marketing tactic was to offer customers a free weekend of HBO or Showtime in cable’s heyday. Netflix plans to do the same thing. According to Greg Peters, Chief Product Officer of Netflix:
“Giving everyone in a country access to Netflix for free for a weekend could be a great way to expose a bunch of new people to the amazing stories we have, the service, how the service works.”
He plans to try out the approach first in India, a country where Netflix is still lightly penetrated and has plenty of room for growth. If it works, expect to see the approach brought to other regions.
Two components make Netflix the first choice for originals
At the end of last year, Hub Entertainment Research said that 34% of people who watched a new show in the previous year saw it on Netflix. 23% said they saw it on an MVPD. In March, 39% said they would keep Netflix over any other channel brand if their choices were limited. There are two main reasons Netflix rates so highly among users: the quality of the content the service provides and how easy it is to find it.
Netflix’ capitalizes on movie theater closures
The company continues to provide a strong flow of quality content for its subscribers. Ted Sarandos, Netflix Co-CEO, says he took advantage of movie theater closures to augment the Netflix produced content over the last several months. He licensed two movies that were originally scheduled for theater release. Enola Holmes, which was produced by Legendary Pictures, was released to Netflix members in September, and the company estimates 76 million will have chosen it in the first 28 days. The Chicago 7 was produced by Paramount Pictures and released by Netflix on September 25.
Other movies that have done well for the company include:
- The Old Guard, watched by 78 million member households in the first four weeks
- Project Power, watched by 75 million
Recommendations drive the majority of video views
Most people discover new movies like Enola Holmes through the recommendations provided by the Netflix app. Mr. Peters says that the service’s recommendations drive a “very significant majority” of video views. He says a substantial number of employees are dedicated to making those recommendations the best they can be. He also says recommendations are a significant factor in keeping people coming back to the service:
“If we do a good job…of giving them something satisfying in that <decision> moment, they’re being fulfilled. That means the next night when they’re thinking about what they want to watch… they’re to turn to us again.”
Why it matters
Though not out of line with overall growth performance, Netflix’s growth slowed considerably in the third quarter.
The company is trying new ways of getting people to trial service.
It is also working to ensure it remains the most popular service to discover something new to watch.