Does a Netflix price hike get me series 3 of House of Cards?

Stuart Lauchlan Profile picture for user slauchlan April 21, 2014
Summary:
I'm only half way through series 2 of House of Cards - will I get it finished before Netflix puts my subscription price up as the streaming content site fires up for further international expansion?

houseofcards
Something struck me over the Easter weekend when I sat down in front of the television in the lounge to watch a TV show at the time it was actually transmitted and that was the realisation that I couldn’t actually remember the last time I’d done that.

With a bit more thought, I could. The last ‘real time’ viewing I’d done was probably around Christmas. Christmas, Easter - live TV is for high days and holidays it seems!

Most of my viewing these days is time-shifted courtesy of the BBC’s excellent iPlayer and, to a much lesser extent, by ITV’s considerably flakey ITVplayer on demand services.

And then there’s Netflix. I signed up for a free trial about a year ago, fully expecting to cancel out within the first month. But here I am, halfway through House of Cards Season 2 (I know, I know - what’s taking me so long?) and with Netflix now an ingrained part of my viewing options.

Yesterday the firm released its first quarter financials, beating analyst expectations to report earnings of 86 cents per share on revenues of $1.27 billion. In last year’s first quarter, Netflix earned 5 cents a share on $1 billion in revenue.

Some other interesting numbers to note:

  • From January through March, Netflix gained 2.25 million US subscribers, bringing the total to 35.7 million.
  • Outside of the US, the firm added 1.75 million subscribers, above its estimate of 1.6 million.
  • International now accounts for 25 percent of streaming revenues, but plans to expand further into France and Germany will mean the international operation will remain loss-making for now.

For CEO Reed Hastings, the uptick in numbers is ahead of plans and gives room for bold ambitions:

“I think we are going to turn out to see that the total addressable market over time are human beings that enjoy TV shows and movies, because everybody is going to be on the internet.

“It comes back to the fundamentals of people wanting to have the convenience and simplicity that the internet enables, whether that's on a smartphone, on a tablet or a smart TV. So that's what's making us optimistic about the long-term in international. Each quarter, we will have some real work to do to figure things out, but I think we are going to find that it's a very big opportunity.”

He adds one bold prediction:

“We think in the fullness of time we can be two to three times larger than domestic HBO.”

Reed Hastings
Reed Hastings

Much of the growth in subscriptions is coming from word of mouth referral, he adds:

"When members are really satisfied they tell their friends about the service and they retain better.

"So it is really driven from member side and when we have great shows coming and unique exclusive and things that make people so passionate about Netflix, then they are again more likely to tell their friends and more likely to stay.

"Fundamentally, it's member satisfaction. Without member satisfaction, you can't get much growth and of course you don't have good retention."

And it sounds as though my free trial timing was good:

“We realized through testing that we don't need to be running around saying Netflix free trial nearly as much. That's very commercial and reductionist.

“By focusing on the core elements of member satisfaction and the content that you get if you joined Netflix we can get to a much bigger market share and a better connection with members. Then when they come to our website and see that they get a free trial, they are doubly happy, but that's not the core reason to come to Netflix.”

Going global

The push into new international markets will remain a priority, following launches in Mexico, the UK, Argentina and most recently the Netherlands. Hastings says new markets mean adjusting tactics:

“We are going to get into a broad set of markets. We are going to learn as we go. If we are very fortunate, we will have programmed it completely correctly from day one.

“More likely we will figure out some stuff's working, some stuff's not. We will adjust the formula, but what we have become really convinced about is around the world, people want the convenience of Internet on-demand video and that that really is a very big and broad need.

"So we are stepping up on the international expansion and we are just going to be pushing ahead market-by-market.”

Having an increased global footprint enables Netflix to cut some better content deals for itself. Hastings confirms:

“Being a single buyer for multiple territories puts us in a unique class of buying. And we hope to realize some economic advantage of that, but also just then being able to coordinate a massive marketing relationship with the studios and networks that produce those shows that we can then take and be a one-stop for them in a world that's pretty fragmented today. So I think we could bring a lot of efficiencies as a global buyer.”

The only fly in the ointment here? Hastings states simply:

“Today the studios and networks aren't setup to be global sellers yet.”

Licensed to stream

While shows like House of Cards and Orange Is The New Black have become synonymous as being owned by Netflix, the vast majority of content on the service is licensed. Ownership has advantages, admits Hastings, but licensing will obviously remain a major part of the corporate strategy:

“We want to be able to make those decisions for how the content is exploited and the more ownership you have, the more likely you can do that, but you can also do that through negotiations in very long-term license deals as well.

“I don't have any religion around ownership versus licensing as long as we get that suite of rights that we are looking for. You will see us going forward doing a mix of both because once you decide you only get new programming that you own, I think that you forgo a lot of great programming.

“We want to put the quality of the programming first and then set deals second. But all along, what we want to do is be able to have much more control over the way the content is exploited on and off of Netflix.”

netflix1
But the competitive landscape is changing. What Apple plans in this space remains to be seen, but the firm has made no secret of its ambition to re-invent TV. That said, the firm is more likely to focus on its $1 billion a year Apple TV business than waging a unlimited streaming content war with Netflix in the short term.

Meanwhile Amazon recently repurposed its content deals in the UK and Germany to deliver Amazon Prime Instant Video to compete with Netflix, following the success of this move in the US. If this international expansion is successful, then other territories may follow. Or, Hastings speculates, Amazon may choose just to focus on its existing three markets for now.

Either way, it’s fresh competition in key markets. Hastings is generous about the prospect of such a rival, arguing that it’s a complementary rather than competitive offering:

“Prime is a great service. I am a Prime member and most Netflix employees are Prime numbers.

“It is very complementary to Netflix. People look at them as multiple channels. You saw that Amazon included us on the Fire TV and of course we been before on the Kindle Fires and it's a great relationship all around.

“We have got unique content, they have got some unique content. They are also doing originals. There are multiple networks out there. It's a very much not a zero-sum game and we are building this ecosystem together that's about Internet video and the more players there are in Internet video, the bigger that ecosystem gets.

“In the big theme is Internet video is taking share away from linear video. So we are all participating in that transformation.”

Verdict

In a note to clients last week, Pacific Crest Securities analyst Andy Hargreaves predicted Netflix can reach 134 million global streaming subscribers: 64 million in the US and 70 million in international markets.

That’s an impressive leadership position to hold in what is set to become an increasingly aggressive market.

But big ambitions come at a cost and the next hurdle Netflix has to face is bumping up its prices in order to increase revenues per subscriber.

Back in 2011, the firm screwed up its last major increase. This week it was taking a more cautious approach, foreshadowing a rise of a couple of dollars (or equivalent) for new subscribers in a letter to shareholders:

In the US we have greatly improved our content selection since we introduced our streaming plan in 2010 at $7.99 per month. Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the US) for a generous time period. These changes will enable us to acquire more content and deliver an even better streaming experience.

Whether existing subscribers escape the price hike for long remains to be seen…as does the impact of any such rise. When Netflix tested the water by raising prices in Ireland by €1 in January, existing members were locked into the €6.99 rate for two years.

So how much am I prepared to pay for Series 3 of House of Cards? Good question.

 

 

Loading
A grey colored placeholder image