Netflix Subscriber Growth: Do the Numbers Lie?
NEW YORK (
) -- Is
Netflix's
(NFLX) - Get Report
new subscriber growth tainted?
The Internet movie rental company reported record subscriber growth in its third quarter of 1.9 million, bringing its total to 16.9 million. This is a 90% surge from a little over 1 million new users in the second quarter, and marked the fourth consecutive quarter Netflix gained more than 1 million new subscribers.
The company also upped its forecast for subscriber growth, and is now expecting between 19 million and 19.7 million subscribers by the end of the year, compared with a prior guidance of 17.7 million to 18.5 million.
Netflix attributed much of this growth to new distribution platforms, like
Apple's
(AAPL) - Get Report
iPad and TV, along with Internet-enabled televisions and Blu-ray players. Netflix's move from a DVD-by-mail company to a streaming company is also attracting a new audience.
Investors were blinded by this rapid pace of new subscribers, ignoring the fact that the company actually missed earnings estimates.
There's no denying what Netflix has accomplished since it first launched its service in 1999 (namely sending Blockbuster and Movie Gallery into oblivion), but if you break down the company's rate of new subscribers, the numbers actually don't look as grandiose.
Of the 16.9 million total subscribers, a little over 1 million, or 6.3%, actually are from free trial subscriptions -- a record high of free-trial users, and a number that surged 291% year-over-year. Free members comprised just 3% of total subscribers in the second quarter.
Thus, the total number of paying subscribers is, in fact, more like 15.9 million -- which is why new subscribers can rise 52%, while revenue grew only 31%.
This increase in free subscribers comes after Netflix recently extended its free-trial period from two weeks to a month, a move that seems odd for a company that has been gung-ho about its membership pace. If the interest for Netflix is so strong, wouldn't the company be looking to shorten (or even do away with) its free membership, not extend it? As most new members opt for the cheaper $8.99 per month subscription, lengthening the free trial period appears counterintuitive.
This acceleration of free users presents Netflix with a new challenge, converting trial subscribers to paying subscribers.
AOL
(AOL)
showed just how big of a problem this can be when it expanded its free subscriptions.
Netflix will have to learn how to manage conversions. On the third-quarter conference call, Netflix noted that newer free trial subscribers are converting to paid memberships at the same rate they did historically. But if this conversion rate slows, it will, no doubt, affect the company's acquisition cost per subscriber.
Concerns have already been raised on just how long Netflix can keep up this break-neck pace. Several analysts are predicting expansion could slow as early as next year.
Converting free subscribers to paid members could turn out to be key in Netflix's ongoing success.
--Written by Jeanine Poggi in New York.
>To contact the writer of this article, click here:
Jeanine Poggi
.
>To follow the writer on Twitter, go to
.
>To submit a news tip, send an email to:
.
RELATED STORIES:
