Netflix Tops 75 Million Members Globally

19 Jan, 2016 By: Erik Gruenwedel

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Streaming video pioneer misses projected domestic sub growth by 90,000

Spurred by 5.6 million net subscriber additions worldwide, Netflix Jan. 19 reported a total subscriber base of 75 million — including 44.7 million in the United States — at the end of the fourth quarter (Dec. 31). Netflix tallied 57.3 million members globally during the previous-year period.

The streaming video pioneer for the second consecutive quarter missed domestic sub growth projections, this time by 90,000 — a decline the company again attributed to the nationwide rollout of new credit/debit cards with embedded chip technology, among other issues.

“Our high penetration in the U.S. seems to be making net additions harder than in the past,” CEO Reed Hastings and CFO David Wells wrote in the investor letter.

The executives said they expect slightly elevated churn in Q2 and Q3 as nearly 2 million domestic subs are moved to the $9.99 HD plan from the previous $7.99 HD plan.

Netflix expects to add more than 6 million net subscribers in 2016. To do that, especially in the U.S., the service is targeting mobile users. It recently inked a deal with T-Mobile to take advantage of the telecom’s free data plans for tablet users, which offers an open-ended platform for third party streaming services. In addition to Netflix, HBO Now, Hulu Plus and other SVOD services are available.

“They’re really focused on trying to give the customers some optionality. It’s seeing a great reception among our users. We’re seeing viewing going up. We hope those kinds of programs expand,” Hastings said on the company’s shareholder webcast. “Think about smartphone usage compared to 10 years ago. Of course the number of smartphones [in use] is up, but usage and utility is [also] up.”

Meanwhile, net income dropped 48% to $43 million on revenue of $1.67 billion, compared with income of $83 million on revenue of $1.3 billion a year ago. Netflix attributed the decline in part to foreign exchange rates and ongoing global expansion.

Streaming revenue grew 21% year-over-year to $1.1 billion. Netflix said it is seeing increased adoption of its Ultra HD plan ($11.99) as more UHD TVs are sold.

“We expect similar modest operating income results for Q1, assuming current foreign-exchange as we invest in our international expansion,” Hastings and Wells wrote.

As previously announced, Netflix earlier in January launched service in 130 additional countries, on a base of 60 countries. The SVOD service said its international expansion is targeting “outward-looking, affluent consumers with international credit cards and smartphones.”

Indeed, content selection in Russia, Eastern Europe, Cambodia and Vietnam is in English targeting consumers willing to spend hundreds of dollars on an iPhone and won’t think twice about $10 a month for Netflix.

“We’re definitely starting off appealing to [consumer] elites,” Hastings said. “In future years, as we do more trying to expand into the mass market, we can look at additional pricing options.”

The company expects to incur about $114 million in foreign contributing losses due to the expansion.

Netflix plans to launch more than 600 hours of original programming in 2016, up from 450 hours in 2015. Third-party streaming content obligations approached $11 billion, compared with $9.5 billion a year ago.

Wedbush Securities media analyst Michael Pachter said that with Netflix increasingly competing for original content with cable and broadcast networks, new programing will go to the highest bidder, with the implication that in order to keep up its batting average, Netflix will have to pay escalating fees for new content. At the same time, the SVOD leader is considered to be spearheading cord-cutting among pay-TV households, especially millennials. 

Pachter contends the pay-TV ecosystem loses about $1,200 annually for every household that cuts the cord and defects to Netflix. While only a percentage of that $1,200 goes to content holders, Pachter estimates $300, or about 250% of Netflix revenue, is lost.

"In order to remain whole, content owners either must charge Netflix more, or must make Netflix’s service less appealing," the analyst wrote in a Jan. 20 note. "In our view, Netflix is on a spending treadmill that is spinning ever faster."

In response to growing fears within the pay-TV ecosystem regarding Netflix growth and impact, Hastings and Wells took the glass half-full approach, reiterating that Internet TV is a “fundamentally better” entertainment experience than traditional broadcast. They said traditional media would be wise to take the content license revenue it receives from Netflix and other SVOD services and ramp up their own online TV platforms.

“[NBC Universal’s comedy SVOD] Seeso, BBC Player, Hulu, CanalPlay, HBO Now and CBS All Access are the beginnings of these efforts,” they wrote.

Finally, Netflix’s oft-ignored legacy by-mail disc rental service generated $80 million in operating income (52.7% contribution margin) on revenue of $151 million and a base of 4.9 million subs. It generated $179.4 million in revenue on a base of 5.7 million subs a year ago.

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