Yesterday Netflix announced its third quarter earnings for 2015. Overall, global membership increased by 3.62 million to 69.17 million subscribers, representing an increase of nearly 20%. Growth on the U.S. side of membership, however, was lower for the period. In the U.S., Netflixadded 0.88 million new members, compared to 0.98 million new members for the same period last year, an 11% decrease.
Why was growth lower for Q3? In its letter to shareholders, Netflix said it believes part of the slowed growth was that the company had higher-than-expected involuntary churn, or inability to collect, because of the reissuance of chip-based credit and debit cards.
Actually, involuntary churn due to the replacement of magnetic stripe cards with chip cards will impact every subscription-based business as well as any other type of business that relies on recurring revenue and card not present sales. In fact, this problem is going to get worse. We predict that the rise in involuntary churn could last through 2017. So far, only 20% of all credit and debit cards have been reissued.
Though we’ve been talking about involuntary churn for months, and have planned an October 22 one-day intensive centered around payment processing solutions, Netflix was the first major player to announce this as a reason for slower-than-expected growth. For more on the topic, please see my interview with industry expert Paul Larsen, managing partner for Paul Larsen Consulting and a presenter and keynote speaker at Mastering Payment Processing for Recurring Revenue.
In spite of the churn, Netflix is predicting a total addition of 6 million U.S. subscribers by year end. If it hits this goal, it will be the fourth consecutive year that it added 6 million subscribers to its U.S. rolls. On the income side, Netflix was also down. Its operating income for Q3 was $74 million, compared to $110 million and a forecast of $81 million. A recent price hike in Europe, the U.S., Canada and Latin America may help lessen the sting for the fourth quarter of 2015.
Though investors showed their support of Netflix with an increased stock price late last week following the price hike announcement, the investors responded negatively to yesterday’s earnings reporting. As of this writing, Netflix’s stock price on NASDAQ dropped to $100.50 per share. In comparison, it was $113.03 on Monday afternoon.
Netflix may find that its fourth quarter membership also takes a hit, again due to involuntary churn, but its price hike will help absorb some of the income loss.
Like other subscription companies, we encourage Netflix to look at ways to prevent involuntary churn as credit and debit cards are reissued in the form of chip cards. They can look to our resources for how to do that, or work with consultants, payment processors and card issuers for solutions to the churn. It will be a tough battle, but one that Netflix – and other subscription companies – can win.
In the meantime, Netflix continues to invest in original content and additional licensing and programming options to bring to its subscribers new and exclusive content. Three years into this “originals strategy,” Netflix shares its success with shareholders: 34 Emmy nominations from 11 original series. It took four wins home:
“It is clear that Internet TV is becoming increasingly mainstream and traditional media companies are adjusting to the shift from linear to on-demand viewing. It is a great time to be a creator of content because studios make content to sell content (not to withhold it) and there are new bidders for their product.”
With so much at stake, it is likely that Netflix will get its involuntary churn problem under control. We hope so. Many companies will face the same issue, but if Netflix gets it right, they can set the stage for others who will also deal with involuntary churn. Meanwhile, we look forward to watching the company’s growth and seeing what new, original content is coming our way!