Netflix Q4 2018 Earnings Highlights: International Markets Drive Subscriber Growth

The US streaming giant Netflix reported earnings for Q4 2018. The company spent heavily on building new streaming content assets, while it kept subscribers glued to their screens throughout the year. The analysis below is a review of Netflix’s year-end quarter and key takeaways.

Key Takeaways:

  • Revenue: Netflix’s total Q4 2018 revenue (domestic and international) climbed to $4.1 billion, marginally missing the $4.2 billion industry expectation. This led to a 4% drop in its stock price reflecting investors’ disappointment over the revenue miss, although the stock price recovered later. On a YoY basis, Netflix revenues grew 35% YoY in FY18 and the growth was well spread-out periodically as well as geographically. Netflix also moved up the app download charts, particularly in the US, within the iOS ecosystem. The chart below clearly underlines the growing importance of international markets for Netflix.

  • New Subscribers: When it comes to new subscriber additions, there are multiple positive indicators. In fact, the net addition numbers crossed the management’s own expectations (7.5 million) with 8.8 million new subscriptions in 2018. This continues to come from international markets outside the US. During the last three years, more than one-fourth of the total new additions have come from international markets.

  • New original content has played a key role in international new additions.
    • Birdbox, Bodyguard and You were primary drivers of growth in Q4 2018, globally. 80 million+ households watched Birdbox. Netflix has been quite open about sharing numbers lately, be it on social media or in its recent earnings report.
    • On the local language content side, shows like Elite did very well in Spain as well as with Spanish-language audiences globally.
  • Pricing: Netflix recently revised the subscription cost of its plans in the US. The overall price increase for different plans ranged between 13-18%. This is expected to generate incremental revenue of $1 billion+ in 2019. Commenting on the price increase during the earnings call, Chief Product Officer Greg Peters said, “Management is confident the price hike will not have a chilling effect on new and existing subscribers.” He further added that the company uses overall engagement levels as the key underlining factor that drives the decision making on subscription cost.
  • US Market Saturation: The US is Netflix’s largest and most highly penetrated market. Therefore, YoY net adds are expected to remain low due to higher penetration. However, Netflix is working on multiple strategies to keep the margins growing even with low new adds and a price increase is one of the ways to drive bottom-line growth, particularly in the US. Overall, Netflix believes that the US Internet television market size has the potential to reach 90 million homes, so there is still room for growth in the US.
  • Burning Cash: Negative cashflows remain a key concern for investors. In the fourth quarter, Netflix logged a deficit of $1.32 billion and $3 billion for the whole of 2018. Netflix started investing in original content in 2014, and its content budget has ballooned from $3 billion in 2014 to $8 billion in 2018, along with rising debt (long and short term combined) which now stands at $18.4 billion. Further, the problem is expected to peak in 2019, as Netflix increases its content spends to put pressure on new entrants such as Amazon, Disney+ and AT&T.
  • Rising FX Exposure: Netflix’s foreign exchange risks are likely to grow as the company expands its geographic footprint. At present, the company is using hedging derivatives and natural hedging in which international market spends are paid in local currency, in case it is favorable.
  • Local Content as a Hook for Global Content: Netflix wants to push its global content, as local content represents a minority audience. However, Netflix continues to invest in local content to onboard new subscribers and get them hooked to their global catalog.
  • Speculations for Lower Pricing in Emerging Markets: So far, Netflix has done well even as a premium service across emerging markets, including India and Latin America. It has been successful in gaining new subscribers with a focus on intriguing original content, quality streaming experience, payment channels, and a polished user interface to drive traction on its platform. Therefore, the probability of lower pricing for emerging markets remains low in 2019.

Strong Winds Loom Against the Video Codec Successor HEVC, Challenging the Licensing Model

Video content encoding is largely skewed towards AVC or H.264 at present. The need for streaming high-quality video content on networks with limited bandwidth is pushing content providers to adopt new video codecs with high compression ratios.

Encoding video content with these codecs allow content providers to achieve a smaller file size without loss of video quality. However, complex value chain of video content delivery and ongoing royalty tussles amongst different camps has left no clear indication as to what the future might hold.

While media firms and broadcasters seem to favor the traditional choice for now i.e. HEVC, they’re still contemplating their next move. They have three codec options to achieve higher video compression ratios – HEVC (H.265), VP9 and AV1. A timeline of codec development and their launch dates is below:


Among the three, VP9 and AV1 are royalty-free codecs. However, HEVC (H.265), the successor of the existing standard – AVC (H.264), is a royalty-based video codec. This means that video encoders pay a hefty licensing fee to patent owners through the licensing firms.

HEVC Licensing Model and its Tumbling Future

HEVC was introduced back in 2013. It was a royalty-based codec, much like its predecessor AVC, and it promised a 50% improvement over AVC compression. Interestingly, Apple has largely been the flag bearer of the HEVC camps and it is also a key patent owner in one of the licensing pools. It provided native support in Apple devices as well as the Safari browser. Thanks to Apple, HEVC has seen higher adoption in terms of hardware support in devices. This meant that Apple devices were optimized for HEVC encoding/decoding at the chipset level.

HEVC royalty is managed by three licensing pools – MPEG LA, HEVC Advance and Velos Media. Such patent pools enable companies to acquire patent rights necessary for the HEVC standard from multiple patent holders in a single transaction as an alternative to negotiating separate licenses. Their role within the industry, often forgotten, is key to adoption of any new technology. In case of video codecs, they’ve played a key role in cementing the foundation of the existing industry standard AVC, against the previous challengers such as – On2’s TrueMotion VP3, Xiph’s Theora, Microsoft’s VC-1, and many others. Below are the key licensors of the existing HEVC licensing pools:

There was already too much confusion regarding royalty pay-outs among licensors. On top of that, licensing firms came under immense pressure when key licensees joined hands to support a royalty-free codec. This was a major setback to the video codec licensing business. Infact, the chairman of MPEG LA, Leonardo Chiariglione, himself shared his doubts in a personal blog about the crumbling licensing model and the challenges ahead for the video codec industry.

“At long last everybody realizes that the old MPEG business model is now broke, all the investments (collectively hundreds of millions USD) made by the industry for the new video codec will go up in smoke and AOM’s royalty free model will spread to other business segments as well.”

Leonardo Chiariglione, Chairman, MPEG (Moving Picture Experts Group)

(Blog Post – A Crisis, the Causes, and a Solution)

VP9 – Google’s Alternative to HEVC

When VP9 was launched, Google was fighting against the odds to push its own royalty-free codec VP9. It made total sense for the likes of Google to work on its own video codec technology, considering the scale of video consumption it was driving (Chrome, YouTube, Android) and the costs involved. Apart from being the primary consumer and biggest beneficiary of this technology, it aimed to enhance the experience on YouTube and Chrome. Google started pushing a royalty-free codec VP9, which offered compression ratios similar to that of HEVC (which was largely doubted by the industry). However, it didn’t gather much support outside its own ecosystem. Firms were quite apprehensive about VP9, as it was competing against the already set standards of the industry which are governed by key licensing firms. Later, it joined the Alliance of Open Media to supplement the development of the AV1 codec.

AOM Challenges HEVC Licensing Pools

The royalty model was shaky. Steam was building up against the royalty-based model due to the high royalties charged by licensing firms and the payment complexities. Key firms in the codec value chain joined hands to form an alliance – AOM, to develop a royalty-free AV1 codec. The list of these firms included Amazon, Cisco, Intel, NVIDIA, Google, Microsoft, Mozilla, Netflix and many others. Obviously, these firms were also the largest beneficiaries of an open royalty-free codec standard. AOM leveraged the features of existing codecs such as Google’s VP9 (for code), Mozilla’s Daala and Cisco’s Thor, and finally released AV1 in early 2018.

The shift favoring AV1 became more prominent when Apple also joined the AOM camp in earlier in 2018. Meanwhile, media owners and distributors are still running tests. Various industry reports suggest that the AV1’s performance is comparable (or at par) with HEVC. On top of that, content aggregators such as Netflix, Amazon, and Hulu (apart from Google/YouTube) are already in support of AV1.

The Future Outlook

As the industry seems inclined to pledge support for the new codec tech, the anticipated success of new royalty-free codecs has exerted more pressure on the video codec licensors. Having said that, HEVC is far more mature in terms of hardware optimizations and software support. The industry also awaits the outcome of existing patent infringement legal battles against the AV1 codec by HEVC flag bearers.

Therefore, HEVC is expected receive priority over VP9 for now.  Companies will just sit and watch for a while to weigh the options. They will analyze and compare HEVC and AV1, on lines of encode/decode requirements, hardware/software support, cost, IP risk, HDR support, etc.

It may be worrisome for the industry if it takes the royalty-free path. It will certainly give much needed stability to the video codec market, but this will come at the cost of reduced technical progress, as there will no incentive for companies to develop new video compression technologies. The next two years will be key to these developments. Nevertheless, the market dynamics has given the licensing firms a chance to rethink their strategy, sort their issues and untangle the licensing model mystery.

Term of Use and Privacy Policy

Counterpoint Technology Market Research Limited


In order to access Counterpoint Technology Market Research Limited (Company or We hereafter) Web sites, you may be asked to complete a registration form. You are required to provide contact information which is used to enhance the user experience and determine whether you are a paid subscriber or not.
Personal Information When you register on we ask you for personal information. We use this information to provide you with the best advice and highest-quality service as well as with offers that we think are relevant to you. We may also contact you regarding a Web site problem or other customer service-related issues. We do not sell, share or rent personal information about you collected on Company Web sites.

How to unsubscribe and Termination

You may request to terminate your account or unsubscribe to any email subscriptions or mailing lists at any time. In accessing and using this Website, User agrees to comply with all applicable laws and agrees not to take any action that would compromise the security or viability of this Website. The Company may terminate User’s access to this Website at any time for any reason. The terms hereunder regarding Accuracy of Information and Third Party Rights shall survive termination.

Website Content and Copyright

This Website is the property of Counterpoint and is protected by international copyright law and conventions. We grant users the right to access and use the Website, so long as such use is for internal information purposes, and User does not alter, copy, disseminate, redistribute or republish any content or feature of this Website. User acknowledges that access to and use of this Website is subject to these TERMS OF USE and any expanded access or use must be approved in writing by the Company.
– Passwords are for user’s individual use
– Passwords may not be shared with others
– Users may not store documents in shared folders.
– Users may not redistribute documents to non-users unless otherwise stated in their contract terms.

Changes or Updates to the Website

The Company reserves the right to change, update or discontinue any aspect of this Website at any time without notice. Your continued use of the Website after any such change constitutes your agreement to these TERMS OF USE, as modified.
Accuracy of Information: While the information contained on this Website has been obtained from sources believed to be reliable, We disclaims all warranties as to the accuracy, completeness or adequacy of such information. User assumes sole responsibility for the use it makes of this Website to achieve his/her intended results.

Third Party Links: This Website may contain links to other third party websites, which are provided as additional resources for the convenience of Users. We do not endorse, sponsor or accept any responsibility for these third party websites, User agrees to direct any concerns relating to these third party websites to the relevant website administrator.

Cookies and Tracking

We may monitor how you use our Web sites. It is used solely for purposes of enabling us to provide you with a personalized Web site experience.
This data may also be used in the aggregate, to identify appropriate product offerings and subscription plans.
Cookies may be set in order to identify you and determine your access privileges. Cookies are simply identifiers. You have the ability to delete cookie files from your hard disk drive.