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Netflix Cites Olympics As Hurting Q3 Sub Growth, Viewing

Company Adds Net 530,000 U.S. Streaming Subs to Stand at 23.9 Million 7/24/2012 4:15 AM Eastern

Netflix expects NBCUniversal's coverage of the 2012 London Olympic Games to have a "negative impact" on U.S. viewing and subscriber signups for the current quarter.

The company on Tuesday said it gained 530,000 streaming subscribers in the U.S. in the second quarter of 2012 to stand at 23.9 million and added another 560,000 internationally -- but the company's growth rates were well below its Q1 results.

For Q3, Netflix said it expects 1 million to 1.8 million U.S. net adds. "If we finish Q3 in the high end of that range, we would remain on track for 7 million domestic net additions for the year; otherwise it would be challenging to achieve that goal by year end," CEO Reed Hastings and CFO David Wells said in a letter to shareholders.

NBCU is teaming with pay-TV operators including Comcast, Time Warner Cable, Cox Communications, Charter Communications, Verizon FiOS and AT&T U-verse to offer 5,535 hours of coverage of all 32 events over the course of the Summer Olympic Games. Those deals also include authenticated "TV Everywhere" access to streaming video on the Web and via mobile apps.

Netflix previously had said it subscriber growth in the second quarter would slow because of quarterly "seasonality." The company had expected to add 200,000 to 800,000 net streaming subs in the U.S. in Q2.

Prior to the earnings release, Netflix stock closed up 0.6%, at $80.30 per share. In after-hours trading, shares plunged more than 13%, trading at $69.55 immediately after the 4 p.m. market close.

Netflix is still wrestling with the company's decision last summer to split apart DVD and streaming plans, a change that amounted to a price hike for most customers and resulted in a net loss of 800,000 U.S. subscribers in the September 2011 quarter.

"Our reputation with our members and their likelihood to recommend the Netflix service is steadily improving. Our original thesis was three years to full brand recovery (subsequent to the DVD-related price increases last summer), and that seems correct so far," Hastings and Wells wrote.

Netflix lost 850,000 million DVD subscribers in the second quarter, ending the period with 9.2 million DVD customers.

Regarding competitors for its streaming business, Netflix execs again cited Amazon.com and Hulu Plus, adding that the joint venture between Verizon Communications and Coinstar -- Redbox Instant by Verizon -- "will face a big challenge to break into the top three of subscription streaming services," Hastings and Wells said.

Longer term, Netflix's biggest competition for viewing hours will come from pay-TV providers and cable networks.

Hastings and Wells gave a shout-out to Comcast for its X1 interface, which they said "is an impressive and leading example of this work. Our task is to keep raising the bar by operating on Internet pace, so that by the time Comcast broadly rolls out X1 over the coming years, we'll be another generation ahead in member-pleasing experiences."

That's in stark contrast to Netflix's confrontational posture toward Comcast just three months ago. Netflix had complained to regulators and lawmakers about the MSO's previous 250-Gigabyte usage cap -- which Comcast in May said it would abandon in favor of usage-based pricing models. Under the prior Comcast policy, usage of its Xfinity video app for Microsoft's Xbox 360 was exempt from the cap whereas Netflix's Xbox app did count toward the total.

The Netflix executives also complimented HBO for its HBO Go initiative, which provides 1,400 titles online and on mobile devices to subscribers of most U.S. pay-TV providers.

"While we compete for content and viewing time with HBO, it is also possible we will find opportunities to work together -- just as we do with other networks," Hastings and Wells said. "Consumers who are passionate about movies and TV shows are quite willing to subscribe to multiple services."

Overall for the second quarter, Netflix posted revenue of $889 million, up 13% from the year-earlier period, and net income of $6 million versus $68 million in Q2 2011.

The Netflix executives noted that the company has increasingly licensed TV content on an exclusive basis, including titles such as Mad Men, Breaking Bad and Gossip Girl as well as Warner Bros.'s past seasons ofPretty Little Liars and The Lying Game.

Hastings and Wells also called out exclusive movies deals, including with Epix, the joint venture of Viacom's Paramount Pictures, Metro-Goldwyn-Mayer and Lionsgate. However, they said, Epix is "increasingly distributed by MVPD and TV Everywhere," and noted that Netflix's online exclusivity expires shortly even though its agreement to carry Epix content non-exclusively runs through mid-2013.