Netflix Packs On 1.7M Streamers In Q1, Gripes About Comcast's Xbox App


Netflix racked up 1.7 million streaming-only video subscribers in the U.S. in the first quarter of 2012, and while company executives said they don't see any "meaningful near-term impact" from TV Everywhere services, they complained that Comcast is giving its VOD app for Xbox an unfair advantage by not counting usage toward bandwidth caps.

Netflix's stock fell more than 16% in after-hours trading Monday, as the company said domestic net adds in the second quarter of 2012 would slow down because of quarterly "seasonality." The company expects to add 200,000 to 800,000 net streaming subs in the U.S. in Q2.

Meanwhile, Netflix confirmed that it is pursuing partnerships with Internet service providers, major retailers, pay-TV operators and others similar to the deal the company struck with Apple to let Netflix users pay through their iTunes account.

In some cases "it may make sense for us to let them bill on our behalf," Netflix CEO Reed Hastings and CFO David Wells wrote in a letter to shareholders. However, they added, "We'll take it slowly; we must make sure we've got the right customer support and financial integration, while maintaining a direct relationship with our members, to ensure the member experience is actually simpler."

Netflix on Xbox

The Netflix executives noted that Comcast limits residential broadband customers to 250 Gigabytes per month of total usage. But while Netflix and other over-the-top streaming services are subject to the cap, "Comcast has decided that its own Xfinity Xbox app is not subject to this 250 Gigabyte cap. This is not neutral in any sense," Hastings and Wells wrote. "Net neutrality principles mean a level playing field for all Internet applications."

That has implications for what Netflix views as its primary long-term competition: pay-TV providers' TV Everywhere offerings, Hastings and Wells said. They said that while "we began to see the consumer promise of TV Everywhere emerge in Q1... Given the superiority of our content selection, user interfaces and device ubiquity, we don't currently see any meaningful near-term impact on our business from these developments."

According to Comcast, usage of the Xfinity app for Xbox is exempt from the cap because it does not use the public Internet.

In the first quarter, Netflix added 1.9 million paid net subscribers in the U.S. to reach 23.4 million total streaming members, but it also lost 1.1 million DVD customers. The decline in DVD members, to 10.1 million, was "slightly better than our expectations," and the DVD losses going forward will decline at a slower pace than the past few quarters, Hastings and Wells said.

For the full-year 2012, Netflix projects domestic streaming net adds will be about 7 million, about the same as in 2010. At the end of 2011, Netflix had 21.67 million streaming subs in the U.S. and 11.17 million DVD customers.

Last summer, Netflix split apart DVD and streaming plans, a change aimed at migrating users to the higher-margin streaming-only platform. That prompted a wave of customer outrage, and Netflix lost a net 800,000 U.S. subscribers in the September 2011 quarter. 

For the first quarter of 2012, Netflix reported revenue of $870 million, up 21% year over year, and a net loss of $5 million (8 cents per share) versus net income of $60 million.

The net loss in Q1 "was better than our expectations, predominantly driven by the outperformance in both domestic and international streaming contribution profit, in addition to slightly lower global Tech & Dev and G&A costs than anticipated," Hastings and Wells said. For the current quarter Netflix anticipates it will post earnings in the range of a net loss of $6 million to a net profit of $8 million.

Netflix's deal with Starz Entertainment, which expired in February 2012, covered 15 Disney titles in the pay-TV window as well as catalog films. According to Hastings and Wells, "There was no discernible change in churn or viewing levels. Instead, the trend towards watching episodic TV, like Breaking Bad, on Netflix continues to grow."

The company's strategy to add full past seasons of TV shows, the Netflix execs said, "is not only a great experience for Netflix members, but can help build the audience for new seasons." They pointed to AMC's premiere of Season 5 of Mad Men, which had a 20% bigger audience than last season's premiere.

"Even now, the most watched episode of Mad Men on any given day on Netflix is the first episode of the first season," Hastings and Wells said. "This means we are still growing the fan base for this show nearly six years after it first premiered on television."

Regarding its original programming strategy, the Netflix execs said that "was a strategic experiment," adding that they are still uncertain about "when or whether we will take it beyond 5% of our large content spend." Netflix exclusively offered Lilyhammer, starring Steven van Zandt, to streaming U.S. subscribers in the quarter.

"If we are able to generate critical success for our originals, it will elevate our consumer brand and drive incremental members to the service. That took HBO nearly a decade to accomplish, so we don't expect overnight results," they wrote.