Report: Netflix Set to Pass Comcast-Owned Sky in U.K. Subscribers

Netflix is projected to pass Comcast-owned satellite pay-TV operator Sky in subscribers by the end of the year, according to new data from Ampere Analysis.

The London-based research firm expects Netflix to end 2018 with 9.78 million subscribers compared to 9.64 million for Sky – which is down 55,000 subs from the end of 2017, according to The Guardian.

Netflix entered the U.K. market in 2011 – its second foreign market after Canada. The SVOD pioneer launched global access (130 countries) in January 2016.

Ofcom, media regulator in the U.K., in July projected Netflix, Amazon Prime Video and Sky’s Now TV over-the-top video service would reach a combined 15.4 million subs by the end of the year – surpassing 15.1 million pay-TV subs.

With British-centric programming at the core of American SVOD services such as BritBox and Acorn TV, Ofcom in November called on U.K. public TV broadcasters to join forces to create a competing over-the-top video platform.

The U.K. represents the second-largest SVOD markets for Netflix and Prime Video.

“It does indicate the growing power of subscription video-on-demand services that Netflix has managed to achieve greater household reach in the U.K. than one of the most successful satellite TV companies in the world,” Ampere analyst Richard Broughton said in a statement.

At the same time, Broughton says Sky’s average-revenue-per-subscriber (ARPU) dwarfs Netflix.

“Netflix makes just £7.99 a subscriber; Sky makes on average almost £50 per subscriber per month,” he said.

 

Netflix’s Other Achilles Heel: SAC

NEWS ANALYSIS – Netflix projects it will add 1.2 million domestic subscribers in the second quarter (ended June 30), which would give the SVOD pioneer nearly 58 million subs in the United States.

A conservative expectation – given Netflix’s market saturation – that will either be confirmed or denied July 16 when the service reports Q2 financial results. Netflix added 1.96 million subs in Q1 compared on a forecast of 1.45 million. Still, concern lingers among investors.

“Should domestic additions fall below last year’s 1.07 million level, we expect Netflix shares to decline,” Michael Pachter, media analyst at Wedbush Securities in Los Angles, wrote in a note. “Should guidance for Q3 net subscriber additions fall below last year’s Q3 additions (0.85 million domestic, and 4.45 million international), Netflix shares may react even more negatively.”

While missing its subscriber growth estimate would undoubtedly send Netflix bears and short sellers into a frenzy, a bigger concern is how much the service is spending acquiring new subs in the United States.

Netflix spent $228 million on domestic streaming in Q1, which was nearly double the $115 million spent in the previous-year period. That equals about $116 in subscriber acquisition cost (SAC) spent attracting each new domestic sub. Netflix spent about $81 for each new sub last year.

With the standard Netflix subscription plan costing $10.99 monthly, it will take the service more than 11 months to recoup the SAC spent acquiring each domestic sub in Q1. In other words, it is costing Netflix more to attract a dwindling new sub base.

By comparison, the service spent about $46 in marketing for each new subscriber outside the United States – up slightly from $44 spent during the previous-year period.

As many observers focus on sub growth, SAC and Netflix’s burgeoning content spend ($8 billion in 2018), the service’s free-cash-flow loss continues to grow exponentially as well. The company has projected a free-cash-flow deficit this year upwards of $4 billion – that’s on top of content spending!

“With declining domestic growth rates and spiraling acquisition costs, Netflix faces a very real set of challenges if it is to continue to command such a strong position,” Richard Broughton, research director at London-based Ampere Analysis, wrote in a note. “Our research shows that while Netflix can continue to enjoy relatively low acquisition costs for international subscribers and a buoyant market keen to embrace SVOD, it cannot afford to take its eye off the ball in the domestic market, even momentarily. Its ability to grow ARPU [average revenue per user] will be critically important to manage long term growth – domestically and abroad.”