06/09/16 10:41 AM EDT

NFLX | Good vs. Bad (US User Survey)

Hesham Shaaban

Takeaway: Account sharing could actually be a funnel, but NFLX is struggling to drum up interest elsewhere. US runway may be shorter than most assume

INTRODUCTION: We’re in the process of running a larger survey to segment NFLX’s US user base and prospects. This is the first batch (n=2,037), but this note focuses only on those respondents where we have demographic data (n=1,637), which is a key component to this analysis. We have married our survey results to 2013 US Census Broadband metrics by Householder age, which we then grossed up to approximate SNL Kagan's more recent US Household Broadband estimates of 101M (via NFLX). The Key Points below are our summary findings, the bulk of the supporting analysis is in the charts below.

KEY POINTS

THE GOOD: Our survey results suggest ~20% of NFLX’s accounts are being shared, which may be a concern at face value, but account sharing could actually be a funnel to new suscriptions. Roughly half (48%) of those freeloaders are considering signing up for their own Netflix account, which is 4x the rate of those not using the service at all. In short, freeloaders are effectively trialing the service. Further, the ratio of account shares to freeloaders is less than 2 (1.6), which suggests a freeloader has access to no more than one account on average. That said, NFLX churn risk is somewhat mitigated by the prospect of new sign-ups amongst freeloaders in the event the host subscriber cancels their account.
THE BAD: The overwhelming majority (84%) of NFLX’s unpenetrated TAM currently has no interest in signing up. It’s important to note that we asked the question with an affirmative bias (i.e. may be interested vs. not at all), and that this is an internet-based survey, so we don’t believe there is a negative selection bias. Granted this is a subjective question; some of those that aren’t interested today may eventually change their mind over time. But what remains of its TAM is decidedly older (~65% are 45+), which is historically a tougher group to penetrate given their below-average usage levels to date (both paid and free). Once again, things could change, but it will likely cost a lot more in per-sub acquisition costs (marketing expense/net adds), which is currently over 55% of NFLX's annual ARPU in the US (TTM basis).
NET-NET: NFLX’s recent softness in domestic net adds could persist in the near-term given that only 16% of NFLX's unpenetrated TAM may be interested in signing up; only a 1/3 of which are currently trialing (freeloading) the service today. Assuming a maximum TAM of 101M US Broadband households (SNL Kagan), NFLX may only have a near-term runway of 9M US accounts vs. the 47M it has today, meaning NFLX may struggle to reach the lower end of its 60M-90M US user TAM estimate. This is a much bigger concern regarding the longer-term prospects of its current operating model, which is essentially dependent on NFLX's ability to grow into its user TAM (see note below). That said, international will become an increasingly important part of this story (note to follow).