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Video streamer Netflix (NASDAQ: NFLX) saw its profits plunge in the fourth quarter. Net income was just $134 million, down 67% from the third quarter and 28% year over year. The company blamed the timing of new shows. Netflix's original content gets depreciated on an accelerated basis, meaning more of the costs are booked up front.
But other costs rose as well, most notably marketing. Netflix poured $730.4 million into marketing during the fourth quarter, a 57% jump compared to the prior-year period. That's a much larger increase than the 27% revenue growth and the 26% paid subscriber growth reported by the company.
Why is Netflix's marketing spending outpacing its revenue growth? There are two reasons.
Image source: Netflix.
A saturating U.S. market
Netflix now has 58.5 million paid subscribers in the U.S., along with another 2 million users on a free trial. That's less than half the total number of households, but the company is clearly running out of runway in its home market. Netflix added 1.53 million paid U.S. subscribers in the fourth quarter, but its customer acquisition costs are through the roof.
Netflix spent $312.7 million on U.S. marketing in the fourth quarter, up 48% year over year. That works out to a whopping $204 for each net new paid subscriber. Looking at trailing-12-month numbers, it's clear that the fourth quarter was not a fluke.
Data source: Netflix. Chart by author. Q4 2018 marketing costs use a new classification system.
Winning a new U.S. customer now costs Netflix more than four times what it cost a few years ago in terms of marketing spend. One factor is that the company is simply running out of households that don't have a subscription or don't use the account of a friend or family member. Another factor could be increased churn. Netflix doesn't disclose how many users drop the service, so there's no way to tell.
International marketing spending also jumped, but that increase was more in line with subscriber growth. Netflix spent $417.6 million on international marketing, up 63% year over year. But it paid less than $60 in marketing for each new paid subscriber.
This increased difficulty winning U.S. customers comes before a fresh batch of competitors arrive. Disney plans to launch a streaming service this year; AT&T will expand its streaming offerings by the end of the year; Apple is rumored to be close to rolling out a streaming service of its own. These new services will join other Netflix competitors like Hulu, Amazon.com's Prime Video, and a slew of skinny TV bundles like Philo and Hulu's Live TV offering. Winning customers is only going to get harder and more expensive for Netflix.