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Netflix missed Wall Street estimates for third quarter earnings today by 3 cents  share. Revenue at $2.98 billion was in-line with analyst estimates of $2.97 billion (and up 30.3% year over year.)
But the big news for investors were in two trends that Netflix reported.
First, Netflix added an impressive 5.3 million members globally. That was up 49% year over year. But the bulk of the growth came outside the United Stats. International growth accounted for 4.5 million of those 5.3 million new members. U.S. membership climbed by only 850, 000. (For the fourth quarter Netflix forecast that it would add 6.3 million members, 1.25 million in the United States and 5.05 million internationally. That would actually be a year to year drop in the number of new members added from 7.05 million, the highest quarterly add ever, in the fourth quarter of 2016.)
Second, the cost of programming continued to escalate. The company said it would pay $6 billion for programming in 2017 and that it will increase that spending by as much as a third next year. Spending on original content for international markets is starting to make up a significant portion of that total. Netflix has just released its first Italian original series, “Suburra,” and will have programs in Japanese and Germany later this year. The recent decision by content originators such as Disney (DIS) to pull programming from Netflix and start their own streaming services will certainly add to costs. What you can see in these expense numbers are signs of a content war that is driving up programming spending at Netflix and its competitors such as Facebook (FB) and Amazon (AMZN.) In that war one company to watch is Hulu, which has something of an inside track on content since Hulu is a joint venture of Fox, Disney, Comcast and other content sources.One thing to watch carefully in coming quarters is the effect of this spending rate on margins. The company forecast that in the fourth quarter it will see a U.S. contribution margin of 34.4%, which would be a decline both sequentially for the third quarter and year over year. Netflix blamed the decline on the need to boost marketing investment and to add to its program offerings. Netflix is more exposed, and therefore a better indicator, to the effects of any content price war than, say, Amazon, since streaming is its only business.