Netflix Adds More Streaming Customers Than Expected, Loses Fewer DVD Users

Upcoming Exclusive Offerings Include 'House of Cards,' New 'Arrested Development'

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Netflix, the world's largest online-video service, posted an unexpected fourth-quarter profit as subscriber growth beat its own forecast Wednesday.

Netflix will begin offering 'House of Cards' on Feb. 1.
Netflix will begin offering 'House of Cards' on Feb. 1.

Netflix signed 2.05 million new U.S. Internet subscribers in the fourth quarter, bringing the total to 27.2 million domestic online customers, according to the company. In October the company had predicted it would add as many as 2 million domestic online customers.

Chairman-CEO Reed Hastings, who signed Walt Disney Co. to an exclusive domestic streaming contract for films starting in 2016, is defying skeptics who have questioned the company's ability to keep growing overseas and purchasing content while facing more competition at home.

The company finished the year with 8.22 million customers in the U.S. getting DVDs by mail as DVD memberships "declined less than we had anticipated this quarter," Mr. Hastings said in a statement. The company alienated many consumers in 2011 when it started charging separately for streaming and for DVDs, part of an effort to pivot toward the online-only business. But now DVD customers are sticking around longer than expected. "The decline has slowed in each quarter since we introduced the DVD-only plan," Mr. Hastings said.

The company still remembers the PR debacle of 2011, however, and is trying to avoid a repeat. "There's still an echo and a bruise," Mr. Hastings said on a conference call to discuss the results. "We're still extremely thoughtful and careful about what we're trying to do because it wouldn't take much for the issue to flare up again or for us to lose trust."

Netflix is investing in original programs to fend off competition from services including one from Inc., TV Everywhere options such as Time Warner Inc.'s HBO Go and a new service called Redbox Instant by Verizon, a joint venture of Verizon Communications and Coinstar's Redbox unit. "House of Cards," a political series featuring Kevin Spacey and Robin Wright, makes its debut on Feb. 1. "We not only have a superior content offering due to our larger budget, but we are further along the experience curve when it comes to improving our user interface and delivering great quality streaming," Hastings said.

Asked how Netflix plans to promote "House of Cards" and other original offerings, Mr. Hastings said on the call that on-demand viewing provides advantages over traditional linear networks, both for viewers and for the company. "The huge benefit is that we don't have to advertise 8 p.m. on a Thursday night tune-in," he said.

In some ways, however, it plans a promotional strategy somewhat similar to TV networks, which rely heavily on their own airtime to promote their schedules. "Mostly we're going to be able to generate tremendous demand through our service," Mr. Hastings said.

The company reported fourth-quarter net income of $7.9 million, compared with profit of $35.2 million, or 64 cents, a year earlier. Analysts had forecast a loss of 13 cents, the average of 28 estimates compiled by Bloomberg. Revenue rose 8% to $945.2 million, beating the $934.5 million average of 28 estimates.

Disney's December deal to offer its full film slate including Marvel and Pixar movies on Netflix led some analysts to reexamine their views on the company's prospects. On Jan. 18, Tony Wible, of Janney Montgomery Scott in Philadelphia, recommended Netflix for the first time in six years.

Netflix accounts for about a third of prime-time web streaming, according to Sandvine Inc., a Waterloo, Ontario-based network services and research company. More than half of consumers ages 18 to 24 years old who have a TV connected to the internet watch Netflix, according to research from NPD Group, a Port Washington, New York-based market tracker.

Netflix shares rose 5.6% to $103.26 at the close in New York, their highest in more than a year.

~Bloomberg News and Ad Age staff~

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