Netflix to Continue Original Content Push, As Streaming Subs Top 36 Million

Netflix shares shot up 24 percent Tuesday following its positive Q1 earnings report released after regular U.S. markets closed Monday, to close Tuesday at $216.99. In a letter to shareholders released Monday, CEO Reed Hastings said Netflix added more than 3 million members to its streaming service, bringing the total to more than 36 million worldwide (CED April 23 p6) . The number of DVD members fell from 8.22 million in Q4 to 7.98 million in Q1. Lower-than-expected content costs and higher revenue led to a higher-than-forecast $113 million in contribution profit for DVD in Q1, Hastings said.

While the number of DVD subscribers declined at a slower rate than expected in Netflix’s Q1, the company remains focused on moving toward more and more exclusive streaming content “to reinforce a reason to join Netflix” and remain a subscriber, said Hastings on the company’s earnings call Monday. Netflix has visions of broadening its portfolio of exclusive content over the next few years, with the timeframe dependent on how new releases perform. In the next two years, exclusive offerings will increase “modestly,” Hastings said. If coming shows the company produces “were as wildly successful for us as the first three shows have been, we could continue to expand to 20 or north, but that would be dependent on what happens the rest of this year,” he said. “What we don’t want to do is -- on the back of three shows, one of which has only been out three days -- suddenly take our commitments up to that 20-plus level."

Commenting on industry speculation that subscribers might join Netflix using a free trial for exclusive programming, such as its first original series House of Cards, and then quit the service after viewing all the episodes in binge viewing over a few days or weeks, Hastings said the speculation hasn’t come to pass so far. “There was very little free-trial gaming,” he said. Fewer than “8,000 people did this out of millions of free trials in the quarter,” said Hastings.

Last week, Netflix launched all 13 episodes of horror thriller Hemlock Grove, which Hastings said had higher first weekend viewership globally than House of Cards had when it launched earlier this year. On May 26, Netflix will start season four, 15 episodes, of Arrested Development.

On Netflix’s ability to curate and influence original content relative to other pay-TV networks, Hastings said Netflix is getting “more sophisticated” in working with producers and the creative community, while continuing to learn. “As we bring great success to the creators, then certainly that increases our reputation in the creative community,” he said.

During Q1, Netflix added members and increased revenue faster than content spending increased, Hastings said, and the domestic streaming contribution margin improved to 20.6 percent. Year over year, the contribution margin expanded more than 600 base points “on essentially flat marketing expense,” he said: The goal is to widen the margin by 100 base points per quarter.

Netflix is putting into place an $11.99 monthly family plan to allow up to four simultaneous streams of programming versus the two allowed under the standard plan. Hastings said he expects less than 1 percent of subscribers to move to the family plan. Netflix has no plans “for the near term” to boost standard subscriber fees from their current $7.99 rate, Hastings said. On the company’s brand image following the public relations beating and customer defections Netflix took in 2011 after the split between the DVD and streaming services, the recovery has been “as expected,” Hastings said. “We're making steady progress and we'll continue to work hard to make steady progress going forward.”

Netflix has released the next generation of its video player technology to its CE partners for integration with smart TVs and set-top boxes, Hastings said. The new platform emphasizes “size and performance improvements,” and delivers faster playback start-up time that aims to approach the speed of a linear TV channel change, Hastings wrote in the shareholder letter. The new platform will appear “in a few new devices in time for the holiday season,” and will roll out more widely in spring 2014 CE products, he said.

Consolidated Q1 net income at Netflix in Q1 was $3 million, Hastings said. The company had an $18 million increase in domestic streaming contribution profit, and a $14 million decline of DVD contribution profit, he said. International losses narrowed by $28 million to $77 million in Q1, he said. Global revenue for Q1 was $1 billion, compared with $945 million in Q4 and $870 million in the year-ago quarter, he said.

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In a sign of a changing video world, Sony Pictures Home Entertainment said Tuesday the first season of Netflix’ original series House of Cards will be available for purchase in Blu-ray and DVD sets June 11. Amazon listed a pre-order price of $33.99 (down from the list price of $55.99) for the three-disc DVD set and $40.99 for the three-disc Blu-ray set ($65.99 list).