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Netflix Not Worried by Streaming Competitors

Posted on Tuesday, Oct 28th 2014

A couple of years ago, online video streaming service Netflix (Nasdaq: NFLX) announced price increases. However, in face of serious customer lashback and a falling stock price, Netflix’s management recalled their price hike. Recently, they tried the move again, raising prices for new customers by nearly a dollar a month. This time round, they were counting on original content and an international market to support the price increase. The recent price hike has not suffered the earlier repercussions, but the market is still wary because the recent quarter saw a slowing down of new customer additions and a weaker forecast for the current quarter.

Netflix’s Financials
Netflix’s third quarter revenues grew 28% over the year to $1.41 billion, in line with the Street’s estimate for the quarter. EPS of $0.96 was better than the market’s estimates of $0.92 for the quarter.

During the quarter, they added 3.02 million streaming subscribers, falling well short of their forecast of 3.69 million subscribers. Of these additions, 2.04 million were international streaming subscribers, again short of their earlier projections of 2.36 million. Domestic user addition also slowed down to 980,000 compared with the forecast of 1.33 million. Netflix attributed the comparatively slow customer addition to their price hike which was offset by the release of the new season of original programming, Orange is the New Black. They ended the quarter with 53.06 million subscribers which included 50.65 million as paid subscribers. Overall, streaming video revenues brought in $1.22 billion and the balance was contributed by the slowly declining DVD business.

For the current quarter, Netflix expects to generate streaming revenues of $1.305 billion, falling short of the Street’s estimate of $1.49 billion. Netflix projected an EPS of $0.44 for the quarter which was significantly short of the Street’s forecast of $0.85. The lower earnings are being attributed to continuing international expansion and investments in content development. They are projecting an addition of 4 million new subscribers this quarter compared with 4.07 million added a year ago.

Netflix’s Rising Competition
Recently, HBO has announced plans to launch a streaming service next year that would enable users to directly access HBO content online without having to subscribe to the channel with a cable provider. Earlier this month, Time Warner also announced similar plans. The new streaming services are expected to begin by next year.

These moves are expected to hurt several online streaming players who have relied on content from broadcasters being made available for streaming through them. The move could impact Netflix’s subscribers due to the strong content available on both HBO and Time Warner. But Netflix is not too worried for now and is viewing these actions to be an overall positive for the industry as it hopes the move would help consumer switch to Internet TV.

Netflix’s Content Growth
As part of their increasing content library, they have also announced upcoming original shows that include historical drama Marco Polo, superhero action series Marvel’s Daredevil, science-fiction series Sense8, and a comedy Grace and Frankie. They have also announced their plans to finance movies that would premiere on their service. These include four comedies from Adam Sandler that are expected in 2016 and a sequel to martial arts drama Crouching Tiger, Hidden Dragon. Other planned TV shows expected this year are Bloodline from the creators of Damages and an animated show titled F is for Family created by comedian Bill Burr.

Netflix’s content line-up has held them in good stead so far. According to a recent comScore report, as of August 2014, nearly 42% of US households were paid subscribers to some form of online video streaming service. Netflix was the biggest provider with 32% of this share followed by Amazon’s 19% share and Hulu Plus’s 9% share.

Netflix’s stock is trading at $379.40 with a market capitalization of $22.86 billion. It touched a high of $489.29 in September this year.

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