Netflix is a programmer like HBO — not a distributor like Comcast or DirecTV.
The Internet streaming-video company underscored that positioning last week after announcing unexpectedly strong fourth-quarter subscriber growth. And borrowing from HBO’s playbook, Netflix said it will increasingly rely on original TV series to keep customers coming back to its multiscreen service.
“Because original series can be completely exclusive to Netflix (no [TV video-on-demand], no linear, no kiosks, no theaters) we believe they will be more effective in attracting and retaining members than equivalent content that is less exclusive to Netflix,” CEO Reed Hastings and chief financial officer David Wells wrote in a letter to shareholders discussing the results.
The company added 2.05 million U.S. streaming users for the quarter ended Dec. 31, to end 2012 with 27.15 million domestic members — driving its stock up 42% on Jan. 24, the day after Netflix released results. The spurt in new subscribers was fueled by consumers who unwrapped new electronic devices, including tablets and smart TVs, during the holiday season, according to Netflix.
Netflix said it expects net additions in the U.S. for the first quarter of 2013 to be slightly higher than the yearearlier period gain of 1.7 million.
And while second-quarter 2013 adds are projected to be down year over year, the Netflix execs said the fourth season of Arrested Development — scheduled to debut exclusively on the service in May — “could bring us higher than otherwise expected membership.”
But how much growth and profitability are ahead for Netflix remain overarching questions, according to VideoNuze analyst Will Richmond, citing heightened competition from the likes of Amazon.com. For the full year, Netflix gained 5.48 million subscribers in 2012, which was 22% below its original target of 7 million, he noted.
“There’s no question over-the-top video services like Netflix are extremely compelling to consumers, but it’s hard to know yet what the true size of the market is or what the adoption rate will be,” Richmond said.
Original series form the third pillar in Netflix’s content strategy, along with movies (a year or more older) and past seasons of current and off -air TV shows, according to Hastings and Wells.
Netflix said it’s willing to spend money to get a lineup of original shows, such as 13 episodes of political thriller House of Cards, starring Kevin Spacey, scheduled to debut all at once on Feb. 1. Netflix outbid rivals HBO and AMC Networks for the rights to the show. In the fourth quarter, Netflix had negative $51 million in cash flow, versus net income of $8 million, as a result of payments for original programs coming to the service in 2013.
“If we are successful with our originals, we will produce content with comparable cost per viewing hour to other exclusive premium content,” Hastings and Wells said.
Netflix also touted exclusive content deals it cut in Q4, including the company’s output deal with Walt Disney Studios, which commences in 2016, and an agreement with Warner Bros. for exclusive access to complete past seasons of such shows as Revolution and The Following.
Meanwhile, Netflix said it continues to try to sign up more Internet-service providers to the Open Connect content-delivery network program, which saves Netflix money on CDN costs. Cablevision Systems and Clearwire are among the participating U.S. ISPs, while Time Warner Cable has complained that Netflix is seeking special treatment for free and withholding content from providers that don’t play ball.
Netflix actually is a boon for service providers, Hastings said on a conference call with analysts last week: “Cable broadband is very profitable,” and high-bandwidth applications like Netflix’s streaming service “help them drive more adoption of the higher-end packages.”
Netflix is following the model of premium cable networks like HBO in banking on original content to drive subscriptions.