Netflix Hopes to Expand ‘Quite Rapidly’ in 2012, 2013, CEO Says

At Netflix, the hope is “to expand quite rapidly in 2012 and 2013, assuming we continue to see the kind of success that we've seen in Canada,” CEO Reed Hastings said in a Q4 earnings call. The company wants “to go country by country,” he said, declining to specify which countries the company plans to expand into. “Wherever we go next is just one building block,” Hastings said. Netflix expanded from the U.S. into Canada last year, but only with a streaming service (CED Sept 23 p8).

The company said it will “significantly” increase the programming available in Canada and it expects “to be profitable on a run-rate basis in Q3” in the country. “Assuming that Canada continues to perform well for us, we will expand into an additional market in the second half of this year,” Netflix said. In deciding which country to enter, the company will consider points including “how competitive it is, how good the broadband is, what content rights we can get, what’s the economic growth rate” and “what’s piracy” like there, Hastings said.

Hastings said he’s “not quite sure what to make” of Amazon’s purchase of the shares it didn’t already own in U.K. rental company LOVEFiLM (CED Jan 21 p4). Amazon previously had a DVD rental business in Europe, “sold that interest to LOVEFiLM” and now has “bought back the whole company,” he said. “We're just going to have to take a couple quarters and see what they plan to do with it.” But Hastings said, “It doesn’t directly affect our plan. There’s vigorous competition in all these markets. So we're full speed ahead on our plans."

Netflix declined to say what proportion of subscriber additions in Q4 involved Internet-connected videogame consoles versus mobile devices such as smartphones and tablets. Hastings said all the devices are “important in international expansion, proportional really to the size of their installed base in a given country.” The devices with “large installed bases” -- Windows and Mac laptops and the Microsoft, Nintendo and Sony videogame consoles -- “are the most popular devices for watching instantly from Netflix,” the company said. Apple TV has “done very well for us, and in just four months has passed the also-growing iPad in Netflix viewing hours,” and the Roku device “remains a strong performer,” Netflix said.

It’s “quite unlikely” that Netflix will start a movie studio or buy a stake in one, Hastings said. And he said he’s “pretty confident that our success is not what’s hurting Redbox.” The parent of Redbox, Coinstar, recently reported weaker-than-anticipated Q4 results (CED Jan 18 p3). DVD rentals were “barely up” for Netflix in Q4 from a year earlier, and titles that Netflix streams don’t include the newest releases, which account for the main business of Redbox, Hastings said. “I don’t think” a partnership with Redbox “was ever that likely,” he said.

Profit grew to $47 million Q4 at Netflix, 87 cents a share, from $31 million, 56 cents, a year earlier, exceeding analysts’ expectations. Revenue rose 34 percent to $596 million. Subscribers grew by 3.08 million, to 20.1 million.

Optical disc shipments grew “only modestly” in Q4, and Netflix said in a letter to shareholders that it expects disc shipments to decline this year. But the company said that “if Blockbuster liquidates this year, like Movie Gallery did last year, we may see a modest boost in shipments.” Netflix said it plans to continue offering DVD rentals “for many years,” despite its emphasis on streaming. The company said “very few of our existing subscribers are downgrading” to its new streaming-only plan.

"The long-term threats” to the “profit stream haven’t changed much over the past year,” Netflix said. “There is the substitution threat of better offerings” from multichannel video programming distributors, with “free TV Everywhere, in particular, making supplemental services like Netflix and Hulu Plus less desired,” the company said. There’s also “the threat of growing piracy from websites like Megavideo and others, especially in international markets,” Netflix said. Other risks include “direct competition” from services including Hulu Plus and rising programming costs, Netflix said. If “pricing uniformly rises so sharply that we can afford fewer titles,” the company said, its growth would slow.

Netflix expects to report profit of $49 million-$62 million for Q1. For the year, the company said, it expects U.S. subscriber additions to keep growing, its Canadian operations to have a positive operating margin in Q3, and the prospect of booking $50 million in operating losses outside the U.S. in the second half as it expands beyond Canada.