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Netflix Nixes Standalone Service in China

17 Oct, 2016 By: Erik Gruenwedel

SVOD pioneer plans to license content to third-party Chinese services due to 'challenging' regulatory environment going it alone

Despite a global footprint, Netflix Oct. 17 announced it plans to distribute content in China through third-party streaming services instead of launching a standalone platform.

“The regulatory environment for foreign digital content services in China has become challenging," CEO Reed Hastings and CFO David Wells wrote in a shareholder letter. "We expect revenue from this licensing will be modest. We still have a long-term desire to serve the Chinese people directly, and hope to launch our service in China eventually."

Meanwhile, after a slight hiccup in the second quarter, Netflix hit it out of the financial ballpark in third-quarter (ended Sept. 30) with nearly $2.3 billion in revenue.

Netflix added 3.57 million subscribers, down 50,000 from the previous-year period, but 1.27 million above projections. It ended the quarter with more than 83 million subs, including more than 47 million domestically. For the first nine months of 2016, Netflix added 12 million global members, the same as in the first nine months of 2015.

The service added 370,000 domestic subs, narrowly exceeding modest projections of 300,000. The tally underscored continued cooling in domestic growth as Netflix added 880,000 subs during the previous-year period.

Netflix added 3.2 million international subs, 1.2 million above projections and 460,000 subs above last year. The service now has more than 39 million international subs.

In September, Netflix localized service in Poland and Turkey, including accepting payment in local currency and incorporating local-language user interfaces, subtitles and dubbing as well as some local content.

“We have seen nice gains in viewing and retention and we’ll undertake other localization efforts in the coming months and years,” CEO Reed Hastings and CFO David Wells wrote in the shareholder letter.

The executives said 75% of existing subs have been converted to the more-expensive ($9.99) price plan, with churn “consistent with our expectations.” Netflix does not disclose churn, or the percentage of subs not renewing service.

Notably, Netflix is spending $6 billion on content, ending Q3 with $14.4 billion in content obligations, up a whopping $4 billion from a year earlier.

“We are now in the fourth year of our original content strategy and are pleased with our progress. In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year,” Hastings and Wells wrote.

Indeed, Netflix said original series “Stranger Things,” a summer hit, according to the SVOD service, was notable since it is produced and owned by Netflix.

“[Original proprietary content] provides us with more-attractive economics and greater business and creative control. In August, we launched “The Get Down,” a highly stylized drama set in 1970s New York City, detailing the origins of hip-hop. We look forward to releasing part two of season one next year,” Hastings and Wells wrote.

Finally, Netflix ended the period with nearly 4.3 million by-mail disc subscribers, down from 4.9 million a year ago. The oft-ignored business unit continues to contribute significantly to the bottom line. Indeed, DVD and Blu-ray Disc rentals generated $68.7 million in segment profit, or nearly 52% of Netflix’s contribution income.

Netflix generated $51.5 million of profit on revenue of nearly $2.3 billion, compared with income of $29.4 million on revenue of $1.7 billion a year ago.

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