Netflix's Subscriber Numbers Beat Estimates as It Spends More on Marketing

Video Service Grew Its Marketing Budget by 59% in the Fourth Quarter

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Kevin Spacey as the manipulative Frank Underwood on 'House of Cards.'
Kevin Spacey as the manipulative Frank Underwood on 'House of Cards.' Credit: Netflix

The number of people who subscribe to Netflix has become a really important number.

A few months ago Netflix reported that not as many people subscribed to its streaming service as anticipated. The figure was still north of 50 million people -- and up 33% year-over-year -- but its relative shortfall indicated that either people really didn't like Netflix's new higher prices or Netflix's growth was starting to slow and at a bad time.

Three months later, Netflix reported on Tuesday that the number of people who pay to subscribe to its streaming video service has hit 54.5 million, which was better than projected. Yet it appears Netflix had to shell out even more marketing money than usual to boost its subscriber numbers.

In the fourth quarter Netflix spent $203.7 million on marketing, which is 59% more than it spent a year ago. Part of the bump was spurred by the premiere of its original series "Marco Polo." But an increasingly competitive U.S. streaming landscape and an urgency to grow its overseas service into a profitable business may have also played a role.

Both HBO and Amazon are going after the same audience that Netflix has been building since 2007. HBO is months away from rolling out a streaming-only service that would compete more directly with its longtime rival, particularly for so-called "cord cutters" who want to watch TV-quality programs without a satellite or cable-TV subscription. And Amazon is coming off two Golden Globe wins for its original series "Transparent," a series deal with Woody Allen and plans to start producing theatrical films.

To counter the competition, Netflix appears to be turning to marketing. In the U.S. the company increased its fourth-quarter marketing spend by 24% to $87.4 million. That helped to deliver 19% more U.S. paying subscribers compared to the prior year. However it didn't help to reverse the domestic subscriber-growth deceleration. Since the first quarter of 2013, the figure's annual growth rate has subsequently shrunk with each quarter.

All things considered, Netflix's domestic streaming business appears sturdy. While subscriber numbers aren't growing as aggressively as they once were, they're still growing, as are revenue and profit. Those 37.7 million paying subscribers in the U.S. generated $917.4 million in revenue -- a 24% increase year-over-year -- to offset the $573.2 million Netflix spent on content acquisition and distribution and bank a $256.8 million profit.

Netflix continues to invest in growing its U.S. streaming business, but it appears to be putting more urgency toward growing its international streaming business in hopes of turning a profit overseas. Marketing to promote that international streaming business has been driving up the company's overall marketing budget in recent quarters and again in the fourth quarter. Marketing spend for its international streaming business hit $116.2 million, a 102% jump.

Excluding marketing costs, Netflix spends more money to make money from international streaming than it does from U.S. streaming. The company spent $350.2 million in the fourth quarter to acquire programs and distribute them to its international streaming subscribers. That's 90% of the money Netflix made from those subscribers. For comparison, Netflix spent $573.2 million in the same period on content for its U.S. streaming subscribers, but that figure was 62% of its U.S. streaming revenue.

Overall, Netflix made $1.48 billion in revenue during the fourth quarter, a 26% increase compared to the prior year, to meet analysts' estimates. And the company booked a $83.4 million profit.

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