Netflix shares fell sharply, following the announcement of significantly weaker-than-expected subscription growth. After a long streak of meteoric increases—Netflix had not had a decrease in subscribers since 2011—130,000 US subscribers signed off from the service in the second quarter of 2019.

The drop has been in part attributed to recent price hikes.

Globally, Netflix added 2.7 million subscribers in the quarter, which was well below the number expected by both the company and industry analysts. Shares closed 10.3% lower.

High Debt Levels

The news put into question Netflix’s debt-fueled business model, which has been to prioritise subscriber growth by streaming hit shows, while also banking on the success of its own in-house production studio.

While some shows it has created, such as Stranger Things and Orange is the New Black, have been runaway hits, numerous others have been duds. The strategy has come at a notable cost.

At the close of June, Netflix had a debt load of $12.6 billion.

Competition

Netflix is also facing increasingly stiff competition from established industry rivals who are building up their own video streaming services. These companies, which include heavyweights Apple, NBCUniversal, and Disney, stand to potentially claw back market share from Netflix in the next few years.

Disney, for example, is set to offer a cheaper streaming service (“Disney+”), with popular offerings such as content from the Marvel franchise, which has had a string of hits including the Avengers series. It will also offer films from the Lucasfilms series, as well as original content.

The two most popular shows on Netflix, Friends and The Office, are set to be removed in 2020 and 2021, respectively. This could also cause Netflix to lose subscribers who joined the service to watch these specific shows.

While analysts are not yet giving up on the Netflix stock, the news has led to a notable tempering of expectations. Netflix was founded in 1997. Originally, it had a mail-in model, whereby customers would receive a physical DVD of a film sent via the U.S. Postal Service. In 2007, it pivoted to a streaming subscription model, which has up until now enjoyed noteworthy success globally.

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