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Mobile-only customers are the key to the next wave of Netflix growth

Key Points
  • Given the rise of mobile-only customers, Netflix's total addressable U.S. market could be larger than 100 million
  • Add 150 million overseas subscribers, and that adds up to $42 billion in revenue.
Netflix CEO and founder Reed Hastings
Joan Cros Garcia | Corbis | Getty Images

Disclosure: Affiliates controlled by the writer of this column have a long position in Netflix.

Netflix was trading slightly above $200 a share ahead of its Q3 earnings report on Monday afternoon.

Its market cap is greater than Time Warner's. And Wall Street is excited about its announcement earlier this month that it is raising its prices on its two higher-priced subscription plans.

Yet, there's more room for optimism about Netflix's current string of success, and it comes down to assumptions relating to how big it can grow its subscriber base.

At its latest earnings report released in July, Netflix claimed more than 99 million paying subscribers around the world and 50 million in the U.S. alone. The video streaming company will announce the latest numbers in the earnings report, which comes after Monday's closing bell.

Several years ago, analysts thought the U.S. ceiling for Netflix was 30 million subscribers because that's where HBO had hit its upper limit in the past. Netflix proved them wrong.

Could it continue to grow its subs meaningfully from here? I think so.

We used to assess Netflix's sub potential based on the number of U.S. households. Yet, Hulu revealed an interesting detail in its recent Advertising Week presentation in New York: 10 to 15 percent of current users are mobile only, and this segment is growing quickly.

Are these mobile-only subs the cord-cutters? Maybe. In that case, the former cable households are perhaps simply replacing themselves as mobile-only users.

But they also might be additive.

Are people going to subscribe to both the cable ecosystem and Netflix? They already are in big numbers. This is because — even with the recent price hikes — Netflix's cost is relatively small compared to the cable bundle.

There are 117 million U.S. households today, according to Google. That's bigger than the peak of 100 million pay TV subscribers.

Last quarter, if mobile-only subs can actually grow the pie beyond the pay TV ecosystem, it might even be possible for Netflix to rise above 100 million U.S. subs longer term. And that's assuming password-sharing in the same household.

The rise of mobile-only subscribers will be equally strong (if not stronger) internationally. International's footprint is already bigger than the U.S. footprint and so will probably only increase its lead.

So if 100 million is a long-term target for Netflix subs, the international market target is probably a minimum of 150 million. That's a total of 250 million.

Currently Netflix is doing $10.2 billion in annual revenue on 103 million global subs. That works out to about $8.21 per subscriber per month.

Project ahead five years. If it's able to raise prices $1.20 each year and has 250 million subscribers, Netflix will do $42.6 billion in revenue that year, well ahead of $10.2 billion in the past year. If it can be much more efficient on that extra $32 billion a year in revenue instead of the first $10 billion a year, it could do $14 billion in EBITDA in 2022. That's a lot more than the $700 million in EBITDA it has done in the last year.

The bottom line here is that Netflix's sub base has a chance to more than double in the long term. Watch for mobile-only users to be a key part of that growth.

Commentary by Eric Jackson, sign up for Eric's monthly Tech & Media Email. You can follow Eric on Twitter @ericjackson.

Correction: This column was revised to correct that Netflix is already trading about $200 a share, that its subscription price increases were announced earlier this month and that the earnings report is coming Monday afternoon.