Netflix on brink of being global TV powerhouse
Netflix has added a record 5.59 million subscribers across the fourth and final quarter of its fiscal year, putting it within touching distance of 75 million subscribers.
Such impressive growth is, primarily, the result of a global rollout that has seen international subscriptions almost double over the past two years.
That global drive has, however, taken its toll on the company’s bottom line. Associated development, marketing and expansion costs have taken a chunk out of profits, pushing the international segment to a $333 million loss for the full fiscal year – one of the worst ever performances. This, in turn, deflated final year net income by 54 per cent over the prior year.
Despite the lower profit outcome, we concur with Netflix’s view that such a deterioration should be seen as an investment that will, over the longer term, pay dividends. The fact that the company now has a global footprint in all countries bar China is a significant achievement, and one that provides it with enormous potential for growth.
Such a global focus is especially necessary given the slowdown in Netflix’s home market, where subscription growth in the fourth quarter was at its lowest for several years. This is hardly surprising given the company’s past success and its relative maturity, but it does underline the necessity to look firmly beyond the shores of the US for future growth.
Despite the slowdown, the US operation remains the prime driver of profit and for the first time ever made a contribution of over a billion for the full fiscal year. While it is unlikely that this profit will be diluted in the near term, increased competition in the market does mean Netflix will have to fight increasingly hard to maintain its share.
On this front there are three reasons to be optimistic. The first is the growing trend among consumers to ‘cut the cable’ and stop subscribing to cable TV packages; this represents a significant saving that can more than cover the costs of Netflix and other streaming services.
The second is that the threat from Amazon is, in our view, overplayed. Many consumers will happily subscribe to both Amazon and Netflix because the former is seen as a more rounded service with a range of benefits, rather than as just another streaming service.
The third factor is the high quality content development in which Netflix is engaging. Series like House of Cards and Making a Murderer are key to persuading existing customers to maintain their subscriptions and new customers to buy into the service.
If Netflix can hold its US position and grow its international operations into profitable territory it will become a truly global powerhouse of the modern age of television.
- Håkon Helgesen is a retail analyst at Conlumino.