“Strong, but not stellar”, Netflix reviews last three months’ performance

Highlights from the latest Netflix shareholder letter, published after its Q2 2018 results

We had a strong but not stellar Q2, ending with 130 million memberships. Membership growth was 5.2m, the same as Q2 last year, but lower than our 6.2m forecast. Earnings, margins, and revenue were all in line with forecast and way up from prior year.

Internet video is growing globally and we are fortunate to be one of the leaders. In addition to succeeding commercially, we are starting to lead artistically in some categories, with our creators earning enough Emmy nominations this year to collectively break HBO’s amazing 17-year run.

Streaming revenue in Q2 rose 43% year over year, driven by a 26% and 14% increase in average paid memberships and ASP (average selling price), respectively.

Internationally, 4.5m net additions grew 8% year over year on broad market growth.

Our broad slate of programming in Q2 highlights the diversity of programming we are providing. We debuted sci-fi action series Lost in Space, which we’ve renewed for another season. In addition, we released the second season of one of our biggest originals 13 Reasons Why, as well as Santa Clarita DietA Series of Unfortunate EventsMarvel’s Jessica JonesLa Casa de Papel (Money Heist), GLOW and Marvel’s Luke Cage. In original kids programming, Boss Baby: Back in Business became one of our biggest kids series ever.

We continue to ramp up our production of non-English originals. This serves as another data point that our international originals can be important to specific countries and regions and also play well outside of their home markets. Late in the quarter, we launched Lust Stories, a new Indian original film, which has been a major success as our largest-watched original in percentage terms in any individual market in its first month. Sacred Games, our first Indian original series, launched on July 6 and is off to a similarly strong start. We will follow Sacred Games up in India with Ghoul on August 24.

We were honoured last week with the most Emmy nominations of any network. The 112 Netflix nominations include five best series and best limited series nominations and are spread across 40 different scripted and unscripted series, TV movies, limited series, documentaries, talk shows, comedy specials and series for kids. This is a testament to the fantastic creators we work with across all forms of television.

We are making good progress with our original feature films. As traditional exhibition focuses increasingly on superheroes and sequels, our on-demand service allows us to serve a wide variety of tastes.

We continue to invest in our mobile experience. Last week, we unveiled our Smart Downloads feature on Android for members that use our offline mode, which is particularly popular in emerging markets. Now, when members finish watching a downloaded episode, it will be automatically deleted and the next episode will be automatically downloaded. Smart Downloads works only when the device is connected to Wi-Fi so cellular data plans won’t be used and device storage won’t be affected since the last watched episode will always be deleted first before the next episode is downloaded. Members also have the option to toggle this feature on and off.

Competition

YouTube and Netflix are two leading global (ex-China) internet entertainment services. HBO and Disney are evolving to focus on internet entertainment services. Amazon and Apple are investing in content as part of larger ecosystem subscriptions. Each of these firms has unique content and is striving to find the best creators from around the world to entertain its viewers. There has never been a better time to be a creator or consumer of content.

We believe that consumer appetite for great content is broad and that there is room for multiple parties to have attractive offerings.

We anticipate more competition from the combined AT&T/Warner Media, from the combined Fox/Disney or Fox/Comcast as well as from international players like Germany’s ProSieben and Salto in France.

Our strategy is to simply keep improving, as we’ve been doing every year in the past.

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