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Netflix shares soar on record subscriber gains

Lessons for local players.

Tue, 18 Jul 2017

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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Netflix shares soar on record subscriber gains