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Netflix Surpasses Expectations with Proprietary Content Strategy

Posted on Friday, Oct 25th 2013

Netflix has been experiencing a remarkable year. The company’s subscriber base surpassed HBO’s subscriber base in the U.S. for the first time, and stock prices have soared more than 400% since the beginning of the year. International expansion is continuing at a strong pace as well. According to NPD Group, Netflix accounted for 89% of the TV streaming market during the first quarter of 2013.

Netflix’s Financials

Netflix saw Q3 revenues grow 22% over the year to $1.11 billion, ahead of the market’s projections of $1.09 billion. Despite rising content costs, earnings grew to $0.52 and surpassed Street expectations of $0.48. For the quarter, the company added $27 million in content costs.

At the end of the quarter, Netflix had more paying members in the U.S. than Time Warner’s HBO has in the country. Netflix considers HBO as one of its key competitors. The company added a whopping 1.29 million domestic streaming subscribers, ending with 31.09 million subscribers. Domestic paying members grew to 29.93 million. International streaming subscribers grew by 1.44 million to 9.2 million, of which 8.08 million were paying members. Netflix attributed growth in the quarter to the success of its original content programs, “Orange is the New Black” and “House of Cards.” “House of Cards” became the first series ever to win an Emmy even though it was never aired on broadcast or cable TV.

For the current quarter, Netflix expects to see domestic subscriptions grow to 32.7-33.5 million, with paying members growing to 31.1-31.8 million members. It expects international streaming subscribers to grow to 10.1-10.9 million. Further, Netflix expects to end the quarter with revenues of $941 million-$965 million with domestic sales account for $731-$741 million and international sales at $210 million-$224 million. It expects EPS of $0.47-$0.73 compared with the Street’s projections of $0.46.

Netflix’s Expansion Plans

There is no stopping Netflix, it seems. To make sure it gets a bigger piece of the viewer pie, Netflix is now in talks with Comcast and other pay television service providers to offer its movie and TV streaming service to viewers through a set-top box. Netflix already has similar agreements with some other international service providers. In Sweden and the UK, the service is available on TiVo’s set-top boxes offered by Com Hem and Virgin Media. Viewers can thus watch Netflix’s content without switching to another app or media device. Recently, Netflix also tied up with Google to enable viewers to watch its content on TV through Chromecast. Netflix believes that further growth lies in its ability to increase its TV screen presence.

International growth is also on the charts. During the last quarter, Netflix launched its service in Nordic countries and the Netherlands. Also, last quarter’s significant international member growth is attributed to free trial offers in Latin America. Netflix plans to add services in other international markets during this quarter.

Netflix’s stock is trading at $330.24 with a market capitalization of $19.5 billion. It touched a 52-week high of $389.16 earlier this week.

The one Achilles’ heel of the current strategy is rising content production costs. Netflix is becoming more like a studio, and it will need to keep producing hit series to maintain its current leadership position in the long run. This is not an easy task.

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