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Netflix, Pandora and other new media reaching limits to growth

Aaron Pressman

They were the new all-digital, online media darlings: Netflix (NFLX), Pandora (P) and Twitter (TWTR). But lately all three have investors worried.

Netflix hit an all-time high of almost $500 a share in September. Since then it’s down 27%. Pandora’s all-time high was in March at over $40. It is down 54% since, including a 28% decline in the past three months. Twitter’s high was last December when it almost reached $75. Even in early October it was still over $55. Today it’s under $40, down 48% from the all-time high, 29% since that early October high.

What happened and can any of the three get their mojo back?

The short answer is that investors see all three with a much lower ultimate audience size than they did before. And unless you believe one of them can suddenly find a huge, untapped audience again, there’s no going back. Of the three, Netflix probably has the best chance, because it is just starting what looks like will be a successful overseas expansion. Pandora looks increasingly tapped out amid fierce competition in the music-streaming space. And Twitter may never have had the reach its boosters claimed.

Shares of Twitter, Netflix and Pandora have fallen over the past three months.

To be sure, small, fast growing companies eventually grow up and become slower growing big companies. That's what happened with Facebook, Google and many others. But growth rates at the new media companies appear to be slowing much sooner than investors anticipated.

Netflix had been adding one million to two million members in the U.S. per quarter, growing from 24 million paying members two years ago to 30 million last year and hitting 35 million in the second quarter. But programming costs have been rising — as well as competition from cable networks’ own streaming apps — so CEO Reed Hastings hiked prices by a $1 a month for new subscribers.

And suddenly, over the last two quarters, growth tailed off. Netflix added 570,000 members in the second quarter and 980,000 members in the third quarter, both down from the prior year’s growth. Hastings has been saying all along that Netflix aimed to have 60 million to 90 million U.S. subscribers. But the sudden slowdown amid a more powerful competitive response and the required price increase spooked investors.

It’s true that more people than ever are watching movies and TV shows over the Internet. The amount of time people spent watching online streaming video jumped 60% last quarter from a year ago, according to Nielsen. But there are an increasing number of options beyond Netflix. Time Warner’s (TWC) HBO led the way with its popular HBO Go app but many other cable networks have followed. Even CBS (CBS), one of the original broadcast networks, has its own $6-a-month streaming service.

Still, Hastings is accelerating his overseas expansion. In September, Netflix kicked off service in France, Germany and a few smaller European countries. International subscribers are much less profitable right now, but that should change as Netflix gains scale. And with only 16 million non-U.S. members, there’s still a lot more room for growth.

Pandora doubled its active listener base from 2010 to 2011 and again the next year. It grew 50% from 2012 to 2013, but since then growth has stalled. Last quarter, annual growth slid to 5% and listenership has been essentially unchanged all year. Pandora faces competition not just from similar products like Apple’s (AAPL) iTunes Radio and iHeart Radio but also the move by streaming services such as Spotify to offer a free tier -- as Pandora does.

Twitter also grew insanely quickly for a few years. Active users doubled from 2011 to 2012, again the next year, then increased 50% at the beginning of 2013 to cross the 200 million threshold. That’s when it was reported that Twitter, still private at the time, was boosting its growth efforts and aiming to hit 400 million active users by the end of 2013.

They fell short, only getting to 241 million by the end of 2013. And over the past three quarters, they’ve only climbed to 284 million. Early on, the comparisons were made to Facebook (FB) but it looks like there’s no way Twitter will reach even half, maybe one-third of the 1.35 billion monthly active users of the more famous social network’s audience size.