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Netflix may reveal growing pains during Q3 earnings

Reed Hastings, chief executive officer of Netflix, speaks during a news conference in Tokyo on Monday, June 27, 2016.
Akio Kon | Bloomberg | Getty Images

Netflix may face tougher times ahead as competitors strengthen their position in the streaming video space.

The company will report its third-quarter earnings on Monday. Thomson Reuters' consensus estimate for the quarter is $2.28 billion in revenue, with the company expected to post earnings of 6 cents per share. That's compared to 7 cents per share on $1.74 billion in revenue in Q3 2015.

Though Netflix remains dominant in the streaming space, ad-supported streaming platforms such as Sony's Crackle and YipTV have been gaining in subscribers, said Tru Optik CEO Andre Swanston.

Tru Optik analyzes streaming media consumption patterns for professionally produced content. Over the last year, its clients — which include Sony Pictures, Sling TV, Crackle and Mindshare, have seen an average 400 percent increase in subscribers, Swanston said. He added that while many of the services are relatively new, which is at least partially why the growth is so high, the data show consumers are opting to subscribe to different ad-supported platforms as the streaming video marketplace matures.

"TV everywhere apps don't need validation from major networks, and straight to OTT [over-the-top] services like Sony Crackle now have millions and millions of viewers. … There's a tremendous amount of growth that has been happening across the OTT and connected TV ecosystem," Swanston said.

Some analysts say Netflix has almost reached the saturation point in the U.S. — meaning everyone who will subscribe to Netflix already has. EMarketer said Netflix will have 120 million U.S. users, or about 63.8 percent of over-the-top video viewers, by the end of 2016. By next year, it will have 128 million users, or 66 percent.

In addition, Mizuho analyst Neil Doshi wrote in a report that as Netflix's un-grandfathering of old rates and price hikes continue to roll out, people will continue to unsubscribe from the service. It recommended a neutral position on the stock.

One other thing that Netflix will have to contend with is rising content costs. Though Netflix is known for its original series, it can be expensive to produce. "House of Cards" was reported to have cost $100 million for the first two seasons.

If Netflix wants to expand internationally, it could be quite costly, Tru Optik's Swanston pointed out. A lot of the rights for popular U.S.-made shows have been snapped up by competitors, he said.

Netflix could try making original series for foreign regions like India and China, but Swanston said it will be harder to license out foreign-language programming because the demand just isn't there. Although there is a growing number of ex-pat viewers in the U.S. that seek content in their home languages, he said they're looking for existing popular shows and sports programs like Bollywood movies and cricket matches.

"I just don't think it's a viable bet that the market is large enough to justify the expenditure of producing original content [for these markets]," Swanston said.

EMarketer said that this year 215.1 million people — or 80.5 percent of U.S. internet users — will watch digital video content on any device. U.S. adults will spend an average of 1 hour 7 minutes per day watching digital video content, breaking down to about 29 minutes on mobile, 25 minutes on desktop/laptop and 14 minutes on other connected devices.