Netflix keeps its House of Cards standing as subscribers top 60 million, but profits tumble
- Summary:
- If you add a million unexpected subscribers to your customer base, then Wall Street will forgive the near halving of your profits - or it will if you're Netflix
What happens when you add a million more subscribers to your digital business than Wall Street was expecting? You get a lot of very happy investors and a share price that shoots up 12% on the announcement.
That’s the happy position Netflix finds itself in after announcing it had added 4.9 million new subscribers in the past 3 months, around 20% more than Wall Street had been looking for.
It also takes global membership to over 60 million - 40 million in the US and the rest from international expansion, with expectations that a further 2.5 million will sign up in the current quarter.
You will find more statistics at Statista
Reed Hastings, Netflix CEO, is confident that number’s going to continue to rise, with original content a prime attraction:
This quarter in particular, we had some amazing original content with Unbreakable Kimmy Schmidt, with House of Cards, with Bloodline. All of that compounded to really push us forward.
What you are seeing is all of Internet TV growing. The attention of the new launches of the competitors is only creating a bigger ecosystem, drawing more and more people into thinking, hey I have got a check that out and try this Internet TV thing.
Away from that staggering subscriber number, Netflix turned in $1.57 billion in quarterly revenue, up 24% year-on-year, but saw profits collapse to $23.7 million against $53.1 million for the same period last year. That drop was blamed firmly on currency exchange rates. When Netflix first launched into Europe, it dealt mainly in UK pounds, but has now switched to the Euro which in turn has hit the bottom line in currency conversion terms.
Going global
International expansion does bring particular issues to the fore, although Hastings says it is a really big upside:
For most global Internet firms, the US is 20% to 35% of usage and revenue. We are not anywhere close to that yet, but we are continuing to invest in international.
We launched France and Germany six or eight months ago and they were successful launches. Now we have added Australia, New Zealand. [In] all of these markets, the Internet and Internet television is catching on and we are leading relative to competitors .
We are feeling very bullish on the long-term in all of these markets. We have seen when we entered in Latin America three or four years ago that it takes us a year or two to build the brand and get awareness. But think of it as consumers in every country in the world want the benefits of Internet television choice and selection and price. So absent severe piracy that might be in some of the newer countries, I think we are going to see large commercial success.
Given that Netflix doesn’t operate in every market yet, the firm has had to deal with viewers in countries such as Poland tapping into Netflix US content via a VPN, a practice which the firm has started to frown upon, changing its Ts & Cs to warn that such subscribers can be shut down from usage. Hastings comments:
It's certainly less bad than piracy, it's not something we encourage. It's actually very hard to detect because VPN gets every good at covering their tracks for all the obvious reasons. Because we are focused on getting global very quickly, I think we will see this issue disappear and it will disappear because we will be able to meet the demand directly in all the countries.
That’s not to say international growth hasn’t had a few stumbles, most recently in Australia where the firm signed a deal to give Optus and iiNet customers unmetered streaming of its service. That’s now a subject of some regret.
In its traditional letter to investors, Netflix says:
Data caps inhibit internet innovation and are bad for consumers. In Australia, we recently sought to protect our new members from data caps by participating in ISP programs that, while common in Australia, effectively condone discrimination among video services (some capped, some not).
Confirming that it wouldn’t be signing any similar unmetered deals in future, the firm added:
We should have avoided that, and will avoid it going forward. Fortunately, most fixed-line ISPs are raising or eliminating data caps in line with our belief that ISPs should provide great video for all services in a market and let consumers do the choosing.
It’s a battle that Netflix also wants to fight in the domestic market, stating in its investors letter:
We support strong net neutrality across the globe, allowing all consumers to enjoy the Internet access they pay for, without ISPs blocking, throttling, or influencing content in the last mile or at interconnection points.
In the US, we have been vocal advocates for, and are pleased with, recent action by the FCC to assure an open and neutral Internet under its Title II authority. In particular, we applaud the FCC for specifically addressing interconnection points. We hope this action serves as an example to regulators around the world looking to strengthen the innovative force of the Internet.
Hastings adds:
It's a new climate with the FCC Title II in place and we will try to figure that out. We have a number of contracts that are in place already. We are very encouraged by the general consumer perspective and political perspective that broadband access is so important that it is a utility. It is like power distribution where it's a natural monopoly in the last mile. There should be one fiber or one cable going to a home with super high speed and that's the architecture of the future. So everything around it being a utility is great for Internet companies like ourselves and it's great for consumers.
But he still has one major goal: to stop the merger of Comcast and Time-Warner:
It's very clear that broadband is a necessary utility across the land. I don't think anyone is a fan of price controls. So our main goal at this point is to get the government to block the Comcast-Time Warner merger. We think, were that merger to come together and as DSL fades, that company combined would have over 50% of US residential Internet homes. And frankly that's just too much in one company.
The rivals
With the share price having already gone up 40% this year, Netflix finds itself with a bigger market valuation - $32 billion - than traditional media rivals, such as CBS, Viacom and HBO. As for the competition, the recent launch of HBO2Go is not seen as a threat, according to Netflix investors letter:
As we have said in the past, Netflix and HBO are not substitutes for one another given differing content. We think both will continue to be successful in the marketplace, as illustrated by the fact that HBO has continued to grow globally and domestically as we have rapidly grown over the past 5 years.
We view Internet MVPD (Multichannel Video Distribution Provider) offerings, like the rumored Apple offering, Sony’s Playstation Vue and Dish’s Sling TV, as more competitive to the current pay TV bundle than to Netflix, which is lower cost, has exclusive and original content, and is not focused on live television.
But overall, Hastings sees Netflix as well-positioned to cope with the competition:
Linear TV has been an amazing fifty-year run, [now] Internet TV is starting to grow. Clearly over the next 20 years Internet TV is going to replace linear TV.
Everyone is scrambling to figure out how do they do great apps. It’s a transition into figuring out the Internet.The way people do that is to get involved with us, with our competitors, to try to start to learn what are the new patterns and modalities because Internet TV is the way that people will consume video in the future.
My take
I can't remember the last time I sat down and watched live terrestrial TV. My SmartTV in the corner, combined with my iPad, means that I'm a complete internet television convert, be it Netflix, BBC iPlayer or NowTV. What will be interesting is how - or rather, if - the traditional (or linear) TV content providers play catch-up with the likes of Netflix.