Netflix racked up about 3.6 million subscribers in the first quarter of 2011 to stand at 23.6 million -- and in the U.S. now has as many video customers as Comcast -- but the company insists it's no threat to traditional pay-TV providers.
Netflix is a far cheaper product and earns much less per subscriber than Comcast or cable and satellite TV distributors. Netflix executives Monday reiterated their position that its service offering is "a supplemental channel" to traditional pay-TV providers.
"While Netflix is likely to show huge growth again this year, we think MVPD [multichannel video programming distributor] cord cutting will be minimal to nonexistent," Netflix CEO Reed
Hastings and chief financial officer David Wells wrote in a letter to shareholders outlining the results. "We hear some stories from customers who have Netflix and no MVPD service, but these are generally people who rely on free broadcast TV (which is now in HD) and supplement with Netflix, rather than switching from MVPD to online."
Competitors cited by Netflix included Hulu Plus and Amazon Prime's subscription-based service -- as well as Dish Network, which recently acquired the assets of bankrupt video chain Blockbuster.
"We also think Dish Network is likely to launch a substantial subscription streaming effort under the Blockbuster brand. Our competitive strategy relative to other streaming services is simply to grow as fast as we can, so we can afford more content, more marketing, and more R&D than our competitors," Hastings and Wells said.
For the quarter ended March 31, Netflix's average revenue per paying subscriber was $11.97, compared with $12.90 in the year-ago quarter. Last fall the company introduced a $7.99-per-month streaming-only package, while simultaneously raising the rates on its DVDs-plus-streaming tiers.
By comparison, Comcast reported the monthly average total revenue per video customer in the fourth quarter of 2010 increased to $133.43 (including broadband and voice), up 10.6% from the year-earlier quarter. The operator, the largest traditional multichannel video programming distributor, had 22.8 million video subscribers at the end of last year and like other MSOs it has seen its cable TV rolls on a downward trajectory for several years.
Netflix had 22.8 million customers in the U.S. and about 800,000 in Canada at the end of the first quarter, and expects to stand at 24.0 million to 24.8 million U.S. and 900,000 to 1.05 million in Canada by the end of June 2011.
Overall, the company posted $718.6 million in revenue for the quarter, up 46% from a year ago, and net income of $60.2 million -- an increase of 87%.
Cable, satellite and telco TV operators have reacted with growing concern that Netflix is stealing video-on-demand viewing or drawing away premium programming subscriptions.
But again, Netflix execs maintained that its service is not a threat to traditional pay television. Hastings and Wells noted that Comcast chairman and CEO Brian Roberts recently said in a Wall Street Journalinterview, "What used to be called 'reruns' on television is now called Netflix."
The Netflix duo responded: "While we don't plan to use that line in our next marketing campaign, he is fundamentally correct. Our focus for TV shows is on prior season TV and completeness of series, because this class of content enables us to license content broadly and provide consumers a differentiated experience."
In recent months Netflix has been stockpiling TV content in deals with Twentieth Century Fox, which included episodes of past seasons of Glee and Sons of Anarchy; Lionsgate for Mad Men; CBS; and Disney-ABC Television Group. It also reportedly outbid HBO and AMC for the rights to the forthcoming series House of Cards starring Kevin Spacey in a deal with studio Media Rights Capital.
"While the size of these deals and their impact on our P&L is often speculated about in the press, spending typically takes place over multiple years and the amortized cost of these deals is taken into consideration in our 14% target operating margin model," Hastings and Wells wrote in their letter.
Regarding the deal for House of Cards, the execs acknowledged it was "slightly greater creative risk" than was typical for the company but said it was justified based on the popularity of the original BBC series. They added that Netflix ideally expects to make "two or three similar, but smaller, deals so we can gain confidence that whatever results we achieve are repeatable."
Meanwhile, premium cable networks Showtime Networks and Starz Entertainment are delaying or withholding content from the Netflix online-streaming service, which they see as increasingly competitive with their traditional cable and satellite TV distributors. HBO has never licensed content for streaming to Netflix or other online distributors.
In their letter, Hastings and Wells said, "We hope over time that HBO and Showtime will let us prove this proposition for them. We think more and more evidence that prior season on Netflix helps current season on MVPD will become apparent from our deals with Disney, Viacom, CBS, NBCU and others."
They did not discuss Starz, whose current agreement with Netflix expires in the first quarter of 2012.
As for premium pay-per-view services -- such as DirecTV's "Premiere Home" with several studios, offering movies at $30 each for early-window releases -- as well as movies distributed through Facebook and the Apple iTunes App Store, Netflix said, "We don't think this PPV activity will have a material impact to Netflix growth."
The Netflix execs also called out data-usage caps enforced by Canada's Rogers Communications, and noted that Netflix now allows Canadian customers to reduce the quality of the video to cut down on bandwidth consumed (to 9 Gigabytes for 30 hours of viewing). In the U.S., AT&T is gearing up to impose a 250 GB limit on U-verse subscribers and 150 GB on DSL subscribers effective May 2 with a charge of approximately 20 cents per GB over those limits.
"We'll study how this affects consumer attitudes about Internet video, and take appropriate steps if needed," Hastings and Wells wrote, adding, "Comcast has had 250 gigabytes caps for years without overage charges and that hasn't been a problem for Comcast customers or for us."
Netflix had expected to end the first quarter with between 22.65 million and 23.70 million subscribers, after ending 2010 with 20.01 million.
For the second quarter of 2011, Netflix in the U.S. expects to have between 24.0 million and 24.8 million subscribers, revenue of $762 million to $778 million, and operating income of $100 million to $116 million. In Canada, it forecast 900,000 to 1.05 million subscribers, revenue of $16 million to $20 million, and operating loss of $10 million to $14 million.
Beyond the U.S. the Canada, Netflix said it expected to incur $50 million to $70 million in operating losses in the second half of 2011 related to its second international launch outside of Canada. In addition, Netflix made some "early content commitments" for a third unidentified international market, where it intends to launch service in early 2012.
Comcast has claimed that usage of its VOD service outstrips Netflix in the cable company's markets. The MSO said a recent report from research firm NPD Group finding Netflix dominates the digital movie market with 61% share followed by Comcast at 8% was inaccurate because the research firm's study includes all the movies streamed via Netflix's on-demand service -- but includes only movies from cable, satellite or telco TV providers for which an additional per-movie fee is charged.