Three takeaways from the Netflix earnings call
Here are three things we found fascinating about Netflix‘s earnings call Wednesday evening. It was a triumphant occasion for the online video provider, which saw its stock climb 30% in after-hours trading on better-than-expected Q4 earnings, subscriber growth, and revenue and a strong forecast for the first quarter.
1. A surge in holiday-related buying and activation of technologies that enable online video viewing — smartphones, smart TVs and tablets — played a big role in Netflix’s better-than-expected subscriber growth.
CEO Reed Hastings pointed out later that its rivals are being helped, as well, specifically mentioning Hulu’s ability to double its subscriber base from 1.5 million to 3 million customers in 2012. “You know, it was only six or seven years ago that the iPhone came out. We’ve had tremendous [development] — we’re now on iPhone 5. If you think about six or eight years from now, by extension we’ll have the iPhone 10, and how incredible will that be, not only for viewing video but maybe controlling what you have all around your house — how immersive that is. All of that helps Internet video services like our own.”
2. When it comes to content, a win can be bigger than a loss.
An analyst asked Hastings why the company could be dismissive of its loss of Starz content when that deal expired last year, saying that one piece of content hardly mattered — and then turn around and talk about how the Disney deal would help it grow subscribers.
His response was that the Starz deal didn’t represent the loss of enough movies to do great harm to Netflix’s subscriber growth, but the Disney pact includes enough movies to move the needle in a positive direction.
“I think if we lost enough content, that would definitely decrease viewing,” the chief executive explained. “And similarly, when we increase content we have to increase it by a lot to make a difference,” he said.
Earlier on the call, Hastings gushed about the Disney agreement, and contrasted it to the deal it had with Starz, which included some Disney films. “It is pretty amazing that the Disney content when it was on our service from Starz was only 2%,” he said. “… Going forward, in addition to the Disney content, we have the Disney-Marvel content and the Lucas films. The rest of our content is growing. The big thing we’re excited about with the Disney content is that once it eventually flows in, it’s fully exclusive to Netflix and as we’ve been talking about, we’re more and more interested in exclusive content.”
The next big movie-studio deal set to expire in 2016 is Sony’s deal with Starz. Hastings said Netflix’s appetite for a Sony agreement is “the same as it was for Disney,” but added that there is no piece of content his company “must have.”
3. Hastings thinks Netflix can eventually get to 50 million to 60 million subscribers (from 27.2 million right now), but doesn’t foresee any negative effect on its dealings with cable networks or pay-TV distributors.
He pointed out that Netflix’s carriage of previous seasons of “Mad Men” helped increase viewership for the most recent season on AMC. “That’s a great win-win,” he said. If the cable networks can benefit in that way, without cannibalizing the episodes they want to showcase over traditional channels, they should have no problem keeping the terms reasonable for Netflix.
As for Pay-TV providers like Comcast, Time Warner Cable and others who could have reason to be wary of a rival with 50 million subscribers, Hastings points to the factor that in many ways is cable’s ace in the hole — broadband.
“The more that people want to do high-definition Skype and high-definition Netflix, it’s inevitable that are going to be new high-speed data packages that are more successful for those ISPs. So they’ve got an incredibly profitable business doing data and that’s great for them. It doesn’t conflict with us. In fact, we … are a critical application to help them drive more adoption of the higher-end packages. And that way we work really well with them.”
— David B. Wilkerson