Earlier this month NetFlix increased the price of their subscription offerings (read more here and here).
And then earlier this week, NetFlix reported Q2 earnings. You can read the Letter to Shareholders here. NetFlix closed the quarter with nearly 24.69 million subscribers – a 65 percent jump from the year-ago period. Netflix expects to finish the third quarter with 25 million subscribers – 12 million taking the hybrid service, 10 million choosing streaming only and 3 million subscribing to the DVD-by-mail service.
The future of the company is clearly streaming. In the letter to shareholders Netflix reported 75 percent of its recent subscriber gains were to the streaming only service. They also wrote, “With the rapid adoption of streaming, DVD shipments for Netflix have likely peaked. Also, in Q2 the total number of subscribers who were on hybrid plans (and, therefore eligible to receive DVDs) declined slightly from Q1 (emphasis added).”
I don’t view the price increases as grab at revenue growth explicitly. Rather I see it as a push to keep the streaming service relevant. In order for the streaming service to remain relevent (and ultimately prosper) NetFlix needs a rich, deep, and current catalog. This is clearly a focus. Again quoting from the letter to shareholders:
We’ve spoken frequently of how we are directing savings generated from declining DVD demand into additional streaming content and marketing. During the quarter, we substantially increased sequential spending on streaming content as titles from our new content deals (discussed below) became available for streaming.
Netflix also continues to work to ensure MSOs, studios, and other content owners or content distributors that they are friend and not foe. Ultimately this is a story about the rights owners and historical distribution relationships getting more comfortable with the existence of Netflix so that newer, richer content can migrate to the streaming services. Comcast Chief Executive Brian Roberts said the “jury is out” whether Netflix will compel people to cut their cable service but that initial fears that it may have been overblown. Quoting a final time from the shareholder letter, you can see Netflix clearly wants to alleviate concerns and highlight the positive value Netflix brings to the value chain:
Cord mending
For the second quarter in a row, U.S. MVPD households grew in Q1, adding nearly 500,000 additional households and deepening evidence that cord-cutting in the past was prompted by economic hard times rather than the substitution of over-the-top (OTT) services for cable.
Since MVPD households are growing while online video use explodes, the data suggests that OTT services like Netflix are complementary to, rather than competitive with, cable television. In this way, the growth of Netflix streaming is no different to the prior growth of the DVD rental market – both supplemental to the programming offering of the MVPDs. Our subscribers overwhelmingly enjoy both Netflix and the wide variety of sports, current season TV shows, news and entertainment available through MVPDs.
Netflix beating Bit Torrent piracy
In May, analysts at Sandvine published a report on global broadband trends suggesting that people are watching and downloading more video over the Internet than ever before. Given the popularity of our streaming service and the growth we’ve experienced in streaming subscribers and hours viewed, we were not surprised by this finding. What did pleasantly surprise us was how we compared to other providers of Internet video. Our low cost, high quality, on demand streaming service has become so good that the largest percentage of the Internet’s traffic is for paid content instead of illegal free peer-to-peer sites like Bit Torrent. Over coming quarters we’ll see if we can recreate this “beat piracy” feat outside of North America.
