Media Moves

Netflix gains subscribers; stock soars

January 23, 2014

Posted by Liz Hester

Investors piled into Netflix shares Wednesday after the streaming video service added more than 2 million customers in the last quarter of 2013. Netflix’s gains presents a conundrum for mainstream cable providers and network television, as well as Internet service providers.

Reuters had this story by Lisa Richwine and Ronald Grover about the company’s earnings:

Netflix Inc added more than 2.3 million U.S. customers in the fourth quarter, sending its shares up 17 percent in after-hours trading, and said it was testing different pricing plans for its monthly TV and movie streaming service.

The world’s largest video streaming company on Wednesday reported net income of $48 million for the quarter, up from $8 million a year ago. Earnings-per-share were 79 cents, Netflix said in a statement, beating the 66 cents average forecast of analysts surveyed by Thomson Reuters I/B/E/S.

The strong U.S. subscriber growth, a closely watched barometer of company performance, came in at the top end of Netflix’s forecast range. Netflix also signed up 1.74 million new customers in foreign markets, bringing its worldwide total to 44.4 million.

Answering critics who question how big Netflix could grow, the company said it expected to add more U.S. subscribers in the first quarter of 2014 than in the year-ago period.

The Wall Street Journal story by John Kell and Amol Sharma focused on the company’s pricing strategy and how to tier offerings for different consumers:

The company, which provides streaming videos as well as DVDs by mail, charges $7.99-per-month and currently allows users to access the service from two screens simultaneously—enabling sharing among relatives and friends. The company said it hopes to eventually offer new members three options. It has tested other approaches, including a $6.99 offering that would allow a single stream and a three-stream alternative.

In a letter to shareholders, Netflix said that if it were to make changes to pricing for new members, existing members would get “generous grandfathering of their existing plans and prices.” As a result, “there would be no material near-term revenue increase.”

“It is not clear that one price fits all,” Netflix Chief Executive Reed Hastings said on a video webcast during which the quarterly results were discussed. “We’re trying to figure out some models of good-better-best price tiering.” The company said in the letter it is in “no rush” to implement new member plans.

The last major pricing overhaul by Netflix came in 2011, when it tried to move away from offering a single plan for streaming and DVD-by-mail by introducing two separate plans. The company reversed course after a customer backlash and a major dent in its stock price.

Justin Bachman wrote for Bloomberg Businessweek that Netflix could run into trouble as higher end video and increased usage strains the broadband infrastructure:

That growth could come alongside higher costs if Verizon Communications (VZ) and other high-speed Internet companies decide to charge video streamers like Netflix, Amazon (AMZN), and Hulu more because of their higher usage of the digital infrastructure. At peak times, Netflix viewers represent about a third of U.S. broadband Internet capacity, according to some estimates. In a case decided last week, Verizon successfully blocked federal rules on net neutrality, which could allow the Internet providers to block streaming services or to charge higher fees for their heavy data loads.

Netflix Chief Executive Officer Reed Hastings dismissed those concerns Wednesday in the company’s quarterly earnings chat with two Wall Street analysts, arguing that any such efforts “would significantly fuel the fire for more regulation, which is not something that they’re interested in,” he said of the Internet service providers. “I think our economic interests are pretty co-aligned.”

He also predicted that the gradual introduction of higher-resolution 4K video from Netflix and other services will slowly boost ISPs, which will expand their technical capabilities to deliver the bandwidth needed for such video. Most people who get Internet service from major high-speed players such as Comcast (CMCSA), Time Warner Cable (TWC), and AT&T (T) do not currently have download speeds that can handle this kind of video.

The Associated Press story (via the Washington Post) pointed out that the stock surge comes after a costly falter in 2011:

The strong showing follows a year in which Netflix’s stock nearly quadrupled in a resounding comeback from a steep downturn triggered during the summer of 2011 after the Los Gatos, Calif. company split apart its Internet video service and DVD-by-mail service. The division resulted in price increases of as much as 60 percent for customers who wanted to keep both options.

Hastings apologized and the uproar eventually died down as the company began stockpiling its $8-per-month streaming service with more original programming, such as the Emmy-award winning “House of Cards.” The second season of that series will be released Feb. 14, contributing to management’s optimism about its subscriber growth for the current quarter ending in March.

As more people connect their TVs to the Internet and buy mobile devices, Netflix’s streaming service is emerging as a must-have pastime. Meanwhile, the DVD-by-mail service is gradually dying as more subscribers abandon watching video on physical discs. The company ended December with 6.9 million DVD subscribers, down from 13.9 million in September 2011.

While the short-term gain in subscribers is good news for the company and its investors, there are some capacity and other technological issues looming. It’s possible that the end of net neutrality could cost Netflix as consumer demand eats into bandwidth.

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