Netflix subscriber growth surges as profits collapse on content costs

Profile picture for user slauchlan By Stuart Lauchlan July 15, 2015
Summary:
Netflix takes a Daredevil approach to subscriber growth, but can the House of Cards stay standing?

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Daredevil

Netflix added 3.28 million streaming subscribers over the three months to the end of June, but that growth came at a heavy price as profits tumbled 63% against rising costs of content creation.

Nonetheless the firm remains determined to expand its service to 200 countries by the end of next year, with Japan, Portugal, Italy and Spain slated to join later this year.

It’s also going to keep on spending on original content with budget there reaching $5 billion in 2016 and a further $1 billion allocated for marketing.

This has to be done to prevent traditional TV networks from making the move across onto internet service delivery. Or as Chief Content Officer Ted Sarandos puts it, Netflix has to become HBO before HBO can become Netflix.

In that battle, content is king, he says:

What we are going to do is continue to grow our content spend on original programming, both in absolute numbers and as a percentage of our total spending, because it's been working. It's been helping grow the brand; and more importantly, it's been driving viewing hours, relative to how else we would spend the money. It's been a very efficient investment to program with original hours versus licensed hours; and that's why we keep pushing that out.

Netflix has also focused on aligning itself with popular brands, most notably Marvel to date, but with Disney coming on board the year. This will be a big win for Netflix, believes Sarandos:

Disney has situated themselves around a handful of very important, very global tent pole brand, like Lucasfilms, like Pixar, like Disney Animation, like Marvel. That programming causes a great deal of excitement for our subscribers, both in terms of viewing hours and then potentially there could be subscriber events. But more likely, it's about viewing hours and people finding great things to watch.

It's very complementary to our growing Marvel relationship with our Daredevil series; and households with children love and trust the Disney brand, and we love the affiliation with it.

He adds:

We are launching content to multiple demographics and in all genres. So the reason why you are seeing the kind of engagement that you are seeing is that we're finding content that everyone can love. So not just one show that's meant to appeal to everybody, not a handful of shows that are meant to appeal, we’re doing shows that are very mainstream comedy, we're doing very elevated shows for some, we're also doing cartoons for kids. So we really are kind of programming it across demographic and not trying to be one thing for all people or not having our brand really define what kind of content that we're doing.

When I said that we wanted to get to be HBO before they got to be like Netflix, I meant that we'd have to get very good at original programming before they get really great at the technology and the direct-to-consumer relationships that they're only starting to invest in now.

Big numbers, Big Data

Including customers signed up for free trials, Netflix now has 65.55 million streaming members world-wide. It added a net 900,000 members in the US and 2.37 million internationally. It expects to add another 3.55 million members in the third quarter, with the US accounting for 1.15 million and 2.4 million coming from international operations.

Growing that audience requires continual investment in product offerings, says CEO Reed Hastings:

The core is really continuing to improve the personalization, being able to more and more accurately present content on the screen, whether that's a TV screen or a phone screen, that a consumer is just very motivated to click on and watch. We've seen tremendous benefit as we've done more and more of that Big Data work.

Then in addition on the user interface, we're always working on performance, usability, testing new ideas. We've got some pretty cool stuff in the lab with multi-video streams on the television screen. We'll see if it tests well. I'm pretty optimistic about it. But there is a ton to learn as smart TVs get better and faster as adapters like Chromecast get better. So there's a lot of innovation on the hardware side that we're taking advantage of.

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Content choice

But the spectre of the competition remains, admits Hastings:

Amazon is growing a very quickly in terms of total viewing hours, but so are we. What's happening is everyone is maintaining their relative share, but the total amount of Internet viewing is growing at a very vigorous rate. So I think they are experiencing significant success on their investments, as is Hulu. I think we'll see that with HBO Now, because there is massive move from linear programming on to the Internet.

Netflix has a differentiator in the internet broadcast space, reckons Hastings:

It’s our only business. So we're totally focused on making a great consumer experience as an entertainment experience; and that's an advantage.

We don't take it for granted. Those kinds of numbers can switch at any time; and so we have to really continue to double down to do new things.

We're continuing to try to raise the antes to get better at what we do. I think that's the key to continuing to hold on to our share as the whole Internet TV market grows.

My take

A genuine example of digital disruption that leaves the incumbents playing catch-up.

But catch-up they clearly can, so it's essential that Netflix keeps ahead of the pack with original content.