Netflix shares soar on record subscriber gains

Netflix original series like Narcos (pictured), The Crown and Stranger Things have helped attract subscribers, and provided more lucrative than licensing others' content

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TVNZ deputy director of content Andrew Shaw recently dismissed it as having “not many great shows” but Netflix seems to be doing okay for itself.

The company’s shares jumped nearly 10% in after-hours trading on the heels of its quarterly financials (UPDATE: In regular trading, that was consolidated into a 13.54% gain, pushing Netflix' market cap to just under $US80 billion).

The key to its success seems to be making its own content – something Mr Shaw might want to bear in mind in a world where it will become harder and harder to gain exclusive deals on shows produced by others.

Netflix’ subscription video on-demand (SVOD) service added a record 5.2 million subscribers in its second quarter – 1.07 million (with 940,000 paid) in the US and 4.2 million (with 3.7 million paid) internationally.

Analysts had been expecting a 3.2 million customer gain, in line with guidance.

Netflix now has nearly 104 million total subscribers, with 51.9 million in the US and 52 million international subs.

Taking out those on free trials, it has just on 99 million paid subs, with 50.3 million in the US and 48.7 million internationally.

Second-quarter revenue was $US2.49 billion, up from the year ago $US2.10 billion.

Still leaning on DVD business to make a buck
Net profit was $US66 million, with Netflix once again leaning on its legacy DVD rental business in the US (which contributed $US122 million profit) to get into the black.

Other themes were also familiar: Netflix continues to put more and more emphasis on creating its own programmes over its earlier strategy of buying a “long tail” of other people’s content (a letter to shareholders notes that last week the Television Academy nominated 27 Netflix original programs with 91 Emmy nominations).

That continues to be good news for Sky TV and the likes of Spark’s Lightbox. Netflix concentrating on its own content (mainly films, dramas, comedies and documentaries) means less of a bidding war for other content. Netflix’ continued lack of interest in sports or news is also a boon for local players.

The bad news, which Mr Shaw has perhaps yet to fully digest, is that making more local, original content costs more money — a lot more money — than licensing a most of your content from overseas. TVNZ is looking to streamline its operation (as broadcast ad revenue falls) just when it needs to ramp it up. And Mr Shaw's boss has ruled out charging for content, though he's open to charging a modest sum for an ad-free version of on-demand content.

Red = US subscribers, brown = subs outside the US, black = total.

In his letter to shareholders, Netflix chief executive Reed Hastings notes a blizzard of upstart competitors, including on-demand efforts from traditional broadcasters. But he notes that Amazon is investing the most heavily in original and licensed content (Hulu, the SVOD service co-operatively owned by ABC, NBC, Fox and others and its 12 million or so subscribers is ignored). Amazon has an estimated 85 million subs for Prime, but the omnibus service also includes music and online shopping perks; it's not clear how many are attracted to it for its streaming video, or who actively use it.

What's without doubt is that original, exclusive content and geo-restricted deals set the streaming video market apart from the streaming music market, which is looking increasingly like a train wreck.

Bullish guidance
Looking ahead to the third quarter, Netflix forecasts it will add 750,000 subs in the US and 3.6 million internationally.

And, in something of a landmark, it predicts its international streaming business will make a positive contribution to profit by the end of 2017.

Once again, there is no mention of New Zealand, although there is some indirect commentary as the shareholder letter references promotional deals with telcos (Spark provides Netflix free for 12 months to customers who sign to an unlimited data broadband plan). It says: “These arrangements are mutually beneficial – our partners gain more customers and can upsell existing subscribers to higher ARPU [average revenue per user per month] packages, while Netflix gains more reach and awareness with consumers across a market. We are likely to expand this approach as a complement to our direct-to-consumer primary approach.”

In March, Roy Morgan estimated more than one million New Zealanders were watching Netflix. See its full survey here.

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8 Comments & Questions

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Im interested in peoples views regarding contemporary media stocks like Netflix.
It appears to me that they are deeply vulnerable to a Uber type disruption.

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I think the potentially disruptive force is straight-to-the-consumer apps like HBO Now, which HBO uses to cut-out middle men old (pay TV) and new (SVOD aggregators). 

Almost two years from launch, however, HBO Now had a relatively modest 2 million subscribers (in part reflecting its relatively high price ($US15/month as HBO tries to keep traditional broadcasters onside as well). 

And just this month, it's been announced that HBO will become part of the bundle of channels offered by Hulu (for no discount over buying HBO Now directly, but it still seems a retrograde step and lacking in confidence to offer a bundle with Hulu).

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I thought Netflix was the Uber like disruption to traditional media stocks like Mediaworks?

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The question comes out of the assumption that disruptions will be rapid in this sector. So Netflix becomes the encumbant.
Uber was interesting in that it uses unlicensed drivers in what seemed like an unthinkable disrupt.
If a newcomer were to use 'illegally' copied content in a 'similar' way Netflix would be toast.
I never did find out whether Uber has ever been legal but from an investors point of view they have taken a lot of revenue of the traditional cab players.
Thats what interests me in the media sector. Some sort of 'possession is nine tenths of the law' business model threat.
No question about capability, content, platform etc. Just its point in time.

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Andy Shaw might be right. Netflix doesn't have many great shows, but what it does have is scores and scores of really good ones, all available on demand to watch at the viewer's leisure and pleasure. And all for the paltry sum of around $12-15 a month. What's not to like? Very satisfying.

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The other strength, particularly here in New Zealand, is Netflix's ability to deliver the content well.
At home we have our smart TV connected to our UFB modem. When you stream Netflix, we're getting it in HD quickly and smoothly. However, when you try other on demand providers (especially TVNZ on demand), the streaming quality is very bad, with blocky interference from a low-grade stream at source.
I don't have any other paid providers (Lightbox/Neon), so can't vouch for their streaming quality, but the content and delivery is what keeps this customer subscribed.

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Agree. There's a ton of quality programming on Netflix (and Hulu and Amazon Prime). I'd love to hear Shaw sit down and explain how low-brow crap his network turns out like Sensing Murder and its endless border patrol/roadside stop shows holds a candle to The Crown or Narcos or Stranger Things or a dozen other series on Netflix.

And agree with the comment about Netflix being better technically (which partly just reflects its scale, of course). There's no pulling teeth trying working out when it will support a particular brand of smart TV or gaming console or whatever -- it's already on every platform going.

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Let us hope that Netflux starts buying up other content such as sport as Sky is getting woeful on all fronts.

Their $17Bn bills for programming is a bit of a worry though.

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