Netflix Added 2 Million New Streaming Customers in Q4

Netflix shares jumped $43.74, or 42 percent, to $147.00 Thursday on Q4 profit of $8 million, a boost in streaming subscriptions and better-than-expected financial results. Netflix lost 380,000 DVD subscribers in Q4, company executives said in letter to shareholders Wednesday, but it added more than two million streaming subscribers following a “particularly strong” holiday sales season.

Tablets, smartphones and smart TVs were “very helpful” in building Netflix’ subscriber base, Netflix CEO Reed Hastings said on the company’s Q4 earnings call Wednesday, saying connected mobile devices are just the beginning of an emerging Internet-connected ecosystem of devices that will someday include Google Glass augmented reality glasses, Internet watches and multi-screen viewing where consumers use a tablet or phone to choose the content they watch on TV.

To increase its streaming subscriber base, Netflix will continue to focus more on exclusive content, a strategy that the company is expanding with the announcement last quarter than Netflix will be the exclusive “Pay 1” content provider for Disney theatrical releases beginning in 2016, executives said in the shareholder letter. On the TV front, Netflix inked an exclusive deal with Warner for previous seasons of serial dramas including Revolution and The Following, licensing the series directly from the studio versus the networks and enabling Netflix to offer the programming faster to viewers.

Netflix isn’t the only streaming content provider with that strategy, executives noted. Linear TV distributors “clearly see the benefit of offering Internet TV,” they said, and competition for viewing time will continue to increase as consumers come to expect Internet-based on-demand viewing options. Amazon Prime, Redbox Instant, and Hulu also offer low-cost streaming offerings -- including some of the same content as Netflix -- along with unique content for differentiation, they noted. “To the degree they have some of the same content as Netflix, they are potentially a substitute for Netflix,” executives said, which is driving the push toward unique content among providers. Of Netflix’s 100 most popular movies and 100 most popular TV shows in Q4, 113 were not on Amazon Prime, Hulu Plus or Redbox Instant by Verizon, they said. Of the 87 titles available on at least one of the services, Hulu Plus offered 27 of the 200; Amazon Prime 73 of the 200; and Redbox Instant 12 of the 200, they said, citing “significant overlap in TV between Hulu Plus and Amazon Prime, and in movies between Amazon Prime and Redbox Instant.”

At the same time, Hastings said on the earnings call that it’s too early to know how much weight proprietary content will carry in the future and whether it will grow to balance that of movies and TV series. The company will have a better idea whether it will invest more in unique content after it measures viewership of House of Cards and Directed that debut next week, along with the amount of “press attention” shows receive and subscriber acquisition trends, Hastings said. The bar for the original series Netflix carries is whether it performs similarly to other third-party content that’s exclusive to Netflix, said Chief Financial Officer David Wells.

In reviewing the competition, Hastings said Amazon Prime content is “mostly a subset of ours” but is starting to add original content, and Hulu has added original content as well. Over time, it’s likely that service providers will compete as they do with HBO. “We'll all have different shows and all be competing for dollars and attention, but not have the same content."

On the type of content Netflix looks to add to its library, Hastings said there are no specific holes the company is looking to plug, but it is seeking more movies, more TV series and more original content. In response to a question on whether Netflix plans to raise the monthly streaming fee from the current $7.99, Hastings said the company is “happy” with $7.99 and isn’t speculating on the future.

A year and a half after upsetting subscribers by splitting Netflix into separate services for streaming and DVDs, the company hasn’t fully recovered its brand reputation, Hastings said. “There’s still an echo and a bruise” that makes the company “extremely thoughtful and careful about what we're trying to do because it wouldn’t take much to have the issues flare up again,” he said. Netflix is “out of jail,” Hastings said, but still has “a year and a half of probation.” Addressing customer satisfaction levels, Wells said they've improved as customers have come to understand the limitations of streaming. Two or three years ago consumers had expectations for streaming content similar to a “DVD full-content library,” and people are “more aware now” of what’s available from an Internet channel, Wells said.

In a business outlook for Q1, executives forecast paid streaming subscriptions in the U.S. of 27.2 million-27.9 million compared with paid DVD subscriptions of 7.45 million-7.85 million. In the shareholder letter, executives referred to Carl Icahn’s recently taken 10 percent ownership position with the company, saying, “We have no further news about his intentions but have had constructive conversations with him about building a more valuable company."

Netflix streaming profit was up $18 million, as DVD profit fell by $3 million, the company said. Revenue was $945 million for Q4, compared with $876 million in Q4 2011, it said. BMO Capital Markets raised its earnings per share estimates for Netflix in 2013 and 2014 to $1.24 and $2.50, respectively, compared with prior estimates of $0.45 and $1.28 on higher expectations for streaming subscriptions. Wedbush, meanwhile, boosted its price target by $10 on “better than expected cost control” but maintained an “underperform” rating, citing recent “subtractions from its streaming catalog” as one factor.