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Netflix, Growing, Envisions Expansion Abroad

Netflix, Growing, Envisions Expansion Abroad

By Emily Steel, The New York Times | Updated: 22 July 2014 11:43 IST

Netflix made its first splash in original programming with "House of Cards," the political drama focused on Washington. Next up, "House of Versailles"?

That was the strategy that Reed Hastings, chief executive of Netflix, jokingly tried to hammer home Monday as the company made clear that as growth in the United States matures, it has set its sights on international expansion.

Netflix said it had surpassed 50 million total members for its streaming service, including free trial memberships, in the second quarter of this year.

Today, nearly three-quarters of its members are in the United States. In the future, it hopes that a growing portion of its membership will come from around the world.

"Ninety-five percent of people who live on the planet live outside the United States, and generally for global Internet businesses about 80 percent of the usage is outside the U.S.," Hastings said in a telephone interview. He added, "We want to bring our services to as many nations as possible."

Netflix increased its total of paid subscribers to 47.99 million in the second quarter, up 34.7 percent from the same period last year. That growth fueled a 25.3 percent increase in total revenue over the same quarter last year, to $1.34 billion. Net income was $71 million, or $1.15 a share, during the quarter, up from $29.5 million a year earlier.

The results point to a pivotal shift in Netflix's business. Three years ago, the company was reeling from a plan to increase prices and split itself into two companies, one for its DVD mailing group and another for its streaming service. Consumers reacted with outrage; about a million subscribers canceled the service, and the share price plunged to less than $53 from just under $300.

Netflix quickly apologized and abandoned the plan. Since then, it has steadily turned its business around based on the thesis that Internet television is replacing traditional television, apps are replacing channels, remote controls are disappearing and screens are proliferating. To lure subscribers, Netflix has been pouring resources into acquiring exclusive programming and original series, including its critically acclaimed "House of Cards" and "Orange Is the New Black" prison comedy-drama.

Now, with growth for its domestic streaming service slowing, Netflix is pinning its future on international expansion. Available in 40 countries, Netflix has announced plans to introduce its service to a number of European markets in September, including Austria, Belgium, France, Germany, Luxembourg and Switzerland. "We joke about it being 'House of Cards,' 'House of Versailles'? " Hastings said when asked about programming issues in France, where companies need to finance a certain level of local productions.

The company said the expansion would increase its international addressable market to more than 180 million broadband households, or twice the number of current broadband households in the United States.

"There is growing demand, for control and for the consumer to be able to click and watch what they want, and so that is why we are stepping up on the international expansion," Hastings said in a videoconference call with investors, discussing the company's earnings. "We really see that this is an enormous moment in history as on-demand Internet services are coming to the fore around the world."

Michael Nathanson, a media analyst with MoffettNathanson Research, said Netflix had managed to navigate through a sea of challenges and that he would not bet against its international strategy. "People said that they would never build a streaming business, and they have," he said. "People said they would never build an original content business, and they have. They have gotten to this point by being smart and resourceful."

The expansion comes at a price, and with its own set of challenges. The company needs to buy content rights in new regions and market the service to a new set of consumers. Netflix does not own the rights to "House of Cards" in some territories, for instance. The international streaming segment lost $15 million in the second quarter, and the company forecast that it would lose $42 million in the third quarter this year.

Netflix has outlined its spending plans for the year. On the budget is nearly $3 billion for content, more than $500 million for marketing and more than $400 million in technology development. New original series in the pipeline include the historical adventure "Marco Polo," "Marvel's Daredevil" from Marvel Television and a third season of "Orange Is the New Black."

The company called its release of the second season of "Orange Is the New Black" in June a success and "every bit of the global media event we had hoped for." The show was the most-watched series in every Netflix territory.

In May, Netflix announced that it was increasing the monthly price to $8.99 from $7.99 for new subscribers (current Netflix subscribers can keep their current price for two years). The company said Monday that the price increase was not having any significant impact on subscriptions.

Television industry executives complain that Netflix does not disclose audience ratings figures for its original series, providing no barometer to gauge a program's success. Netflix says that because it does not sell advertising or accept programming fees from cable or satellite companies, it has no reason to disclose the viewer metrics.

Overall, Netflix is forecasting continued growth for the third quarter. The company said it expected to increase its total membership roll by 3.69 million, to 53.74 million, with the international business adding 2.36 million subscribers. In the second quarter, Netflix added 1.69 million new subscribers, with about two-thirds of those new members coming from outside the United States.

The news comes as a series of huge deals are set to reshape the television business. Awaiting regulatory approval are Comcast's $45 billion deal for Time Warner Cable and AT&T's $48.5 billion proposed takeover of DirecTV. Netflix has been an outspoken critic of the Comcast-Time Warner Cable tie-up.

Also making waves is 21st Century Fox's pursuit of Time Warner that, if consummated, would create a behemoth in the television and entertainment industry. Analysts have raised concerns that a merger could affect Netflix's leverage in acquiring original programming.

Netflix executives played down the ramifications of such a deal, noting that the companies were already mass conglomerates.

"We'll take it as it comes," Hastings said. "The more that we are working directly with producers, the less vulnerable we are to aggregation of the big content providers."

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