Netflix Continues to Invest in Content

Online video streaming services provider Netflix (Nasdaq: NFLX) is continuing to see strong growth. According to a comScore report, nearly 42% of US households were subscribed to a paying video streaming service as of August 2014. Netflix was the market leader with 32% of total households as its subscribers. Amazon came a distant second with 19% households subscribing to their Instant Video service. Hulu Plus was the third largest player with a mere 9% of households.

Netflix’s Financials
Netflix saw first quarter revenues grow 26% over the year to $1.57 billion, in line with the Street’s estimates of $1.57 billion for the quarter. EPS of $0.77 was short of the market’s estimates of $0.82 for the quarter.

International revenues grew 55.4% to $415 million and domestic revenues grew 23.3% to $985 million. DVD revenues continued to decline and reported a 3.5% reduction to $173.2 million.

Among operating metrics, Netflix added 4.9 million new subscribers during the quarter to end with 62.27 million subscribers worldwide. They added 2.3 million net subscribers in the US and added 2.6 million subscribers in international markets. They reported that they had streamed 10 billion hours of video content in the quarter and plan to deliver 320 hours of new, original programming this year. They are looking to expand their international presence to Japan by the end of the current year.

For the current quarter, Netflix forecast $1.47 billion in streaming revenue, and 2.5 million net subscriber additions. The market was looking for $1.48 billion revenues with 1.97 million net subscriber additions.

Netflix’s Content Worries

Netflix is gearing to compete with pay-TV providers like Comcast and Time Warner Cable who are countering the cord-cutting process by giving access to their own shows through online streaming. Recently, Time Warner introduced HBO Now, a service that is available as a standalone subscription. Now viewers will be able to subscribe to watch HBO without having to subscribe to the entire suite of Time Warner services.

Netflix has been competing with TV service providers by providing original content. But now, they are looking to exclusively distribute this original content, instead of just developing it. As of now, even though some content is known as Netflix Original, it is still available through other TV providers, including Amazon. Netflix is planning to change that soon as they are evaluating the options of making this content exclusive. While the move will be helpful for series that are doing well, it will also have a potential risk for series that don’t do so well. Netflix could possibly also look at earning licensing revenues if they choose to have ownership of their content. With ownership, Netflix will not only have exclusive distribution rights to their content, but will also have the ability to license out this content for additional revenues. The move is similar to what HBO does right now with their content.

But all of this will come at a significant cost. Netflix is already pouring money into the procurement of content. For the current year, they have committed a spend of $9.8 billion in acquiring licensed content and developing original content. This is nearly 33% higher than their previous year’s spend. Many analysts believe that to cover this investment, Netflix may again have to increase their subscription prices. Netflix had already announced a price hike last year. But if their content library were to continue to improve, they may just be able to pull off another price hike.

Netflix’s stock is trading at $574.6 with a market capitalization of $34.76 billion. It touched a high of $577.10 last week.