Tucked into Netflix’s second quarter earnings report was an interesting wrinkle about industry semantics. Co-CEO Reed Hastings made a point of diverting from the familiar metric known as ARPU (for average revenue per “unit”) and instead using the term average revenue per “membership,” or ARM.
The pivot is designed to remind investors, analysts, and Netflix itself that in the modern video business, the elemental source of a subscription isn’t a “unit,” but a person. Hastings tweeted that Netflix is “trying to be more human.”
There’s more to the concept than just a feel-good vibe, however. It’s a recognition that the video industry might be smart to shift from a “household” orientation to an individual orientation, with positive implications for category growth.
The lingering reliance on households as the defining unit of a billing relationship is self-limiting. There are about 120 million households in the U.S., but there are nearly 2x as many people over 18 living in them. Streaming video providers like Netflix don’t sell their services to structures, but to individuals. As a result, it’s not unusual for a “household” to represent more than one subscription unit. Think of the case where four roommates live in the same dwelling, with three of them maintaining their own unique video streaming accounts (mitigated somewhat, of course, by some friendly password sharing).
No better representation of the virtuous multiplication factor here exists than in the mobile/cellular phone category. In the U.S., there are some 440 million cell phone accounts, per the wireless industry association CTIA. The shift from housebound landline phones (one line serving multiple people) to individualized mobile plans (more accounts than there are people) has been an enormous driver of growth for the “telephone” industry.
Next? Households historically have been used as cable’s go-to denominator of market presence and penetration. But it might be time to retire the concept. Netflix’s twist on “ARM” is a step in that direction, and one that serves as a reminder that the opportunity is larger than just the number of dwellings in the U.S.
As for the number of ARMs out there, Netflix had a mixed quarter, with the net number of U.S. and Canadian accounts shrinking for just the second time, by 430,000. That left the North American total at just under 74 million as of June 30 and prompted some hand-wringing this week among analysts who are worried the entire streaming category might be in for a period of slowing growth. On the flipside, Netflix chugged along solidly on the global front, adding 1.54 million net new subscriptions outside of North America to bring the overall total to 209 million. For anybody who’s counting, that’s about 3% of the world’s population.
