Netflix takes profit hit but piles on international subs

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My biggest takeaway from Netflix’ latest quarterly result is, once again, it was only the company’s old-world DVD rental business that kept it in the black [UPDATE: This trend continued in the company's fourth quarter.]

It brings to mind Sky TV [NZX: SKT] boss John Fellet’s description of the streaming video on-demand market, as a “mutual suicide pact.”

“It’s by no means clear that any contender will emerge as the winner. At some point, Netflix has to move to make a profit from its core business, Mr Fellet says.

Netflix’ results commentary states: “Our DVD-by-mail business in the US continues to serve 5.3 million members and provided $US77.9 million in contribution profit in Q2 [the three months to June 30].”

Overall, Netflix reported a quarterly profit of $US26.3 million, down from the year-ago quarter’s $US71 million profit. Revenue rose to $US1.64 billion from the year-ago quarter’s $1.34 billion.

Offshore losses balloon
Netflix’ business outside the US, which included the first full quarter of the Australia and New Zealand operation, saw its loss increase to $U92 million, from a year-earlier loss of $US15 million.

Total paid subscriptions (most media is including the Netflix headline number, which includes triallists) in the US increased to 41 million from the year-ago 35 million and the prior quarter’s 40.3 million.

Total paid international subs increased to 21.6 million from the year-ago quarter’s 12.9 million and the prior quarter’s 19.3 million.

Both numbers were a little ahead of analysts’ and Netflix’ projections.

Early indications of ANZ uptake
How many of those adds were in Europe, and how many in Australasia?

Netflix is not saying. All up, the company’s management commentary, earnings call, letter to shareholders and associated spreadsheets offer no detail on Australia and NZ and only scant, vague commentary. Netflix Australia-NZ is described by the company’s CFO as a “strong launch” that helped contribute to stronger than expected growth in subscriber numbers overall.

Although Netflix hasn’t released any numbers, it is obvious the streaming video on-demand market has boomed overall in New Zealand.

Chorus has recorded a jump in bandwidth throughput of about 40% since January (a period that has seen the launch of Netflix NZ, Sky TV’s Neon, and Spark’s Lightbox). Our largest ISP, Spark, says its data traffic is up about 30% and SVOD mania is behind the surge.

And there are indicators Netflix ANZ is doing well.

Horizon Research recently questioned its panel of 1486 adults (weighted to match NZ’s population) on their SVOD habits.

Extrapolating their responses to the population as a whole, the company estimates 220,000 New Zealanders are using Netflix – putting it streets ahead of rivals.

CallPlus earlier said Netflix NZ and Netflix US now account for 25% of its traffic. Horizon puts Quickflix on about 25,600 users, and Sky TV's Neon on 16,000.

It didn't collect a number for Spark's Lightbox (expect a number when Spark reports its full-year result on August 21. The company earlier said it was targeting 70,000 subs by June this year – but that was before it merged with Coliseum Sports Media and also made its service free to 600,000+ Spark broadband customers).

A survey by Roy Morgan across the Tasman has also found Netflix streets ahead of the competition (though note these are viewership figures, not subscriber numbers, and that this survey’s numbers will include those on the one-month or longer free trial periods being offered by each SVOD service):

Doubling original content
A key theme for analysts is whether “Netflix is trying to become HBO faster than HBO is trying to become Netflix”.

HBO recently launched a direct channel, cutting out old middlemen (pay TV providers) and new middlemen (Netflix, etc).

Whether in direct response to that development or a broader push to differentiate itself in the crowded SVOD market, Netflix has committed to doubling its original programming (320 hours last year) over the next year – and it’ll all be in 4K and HDR (that is, higher quality than other SVOD services).

At the moment, things are lumpy. Earlier deals with other broadcasters mean some of Netflix’ own content, such as House of Cards series three, is absent from Netflix ANZ. However, the company says from this point on all of its original series will be exclusive to Netflix in this part of the world.

When Netflix ANZ launched it had about one-eighth the content of Netflix US, with the local service crimped by Sky TV (which has since inked a five-year deal with Disney, helping to fortify its position). Earlier this month, Netflix reps told NBR the company is adding content to Netflix ANZ all the time, but it can't say when it will approach the level offered in the US.

Build it, and they will pay
Lastly, Netflix also rolled out a graph underlining the huge share of internet traffic it enjoys in the US. Again, it’s notable how BitTorrent (often used for piracy) has shrunk. Give people the choice, and most will pay.

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