Commentary

Netflix Has Boffo Q4 2016; Content, Global Rollout Pay Off

Beating analysts’ already high expectations, Netflix yesterday announced it had added 7.05 million subscribers in its final quarter for 2016, with more than 5 million of them from overseas. As it celebrates its tenth anniversary as a streaming service — it still ships DVDs by mail to 4.1 million diehards, by the way — it generated $8.3 billion in global streaming revenue and finished the year with 93.8 million subscribers in 190 countries.

“The company's stock shot up more than 8% after markets closed, hitting a record high above $145 per share. That's roughly $10 per share more than the previous record high price reached by Netflix on Tuesday afternoon, when the market seemed to anticipate a stellar quarterly report,” writes Tom Huddleston, Jr. for Fortune. At the same time, he points to a story by his colleague Jeff Bukhari that suggests that the stock price is riding “high brand identity” and may be overvalued by mesmerized investors.

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At any rate, Netflix’ trailer for its future is packed with action and optimism.

“The next decade will be even more amazing and tumultuous as Internet TV supplants linear TV, and as we strive to remain a leader,” the company said in a definitively forward-looking statement leading its 11-page letter to shareholders yesterday. 

“Unlike Hulu, which is competing against live TV and cable providers, Netflix is going after audiences who are looking for content to watch in their leisure time, Forrester principal analyst Jim Nail said to CNBC” writesCNBC’s Michelle Castillo. “The question becomes is Netflix's $7.99 to $11.99 a month worth it for the kinds of shows and movies you can watch, he added. And, as the subscriber number show, the answer is yes.” 

“Their original content and doing it at such a high level of quality really takes Netflix out of that comparative decision [against other entertainment providers],” says Nail.

It was a “brave move” to cull “hundreds” of big-screen titles from its offerings last year, which was “the result of the streaming service’s decision to end several key content deals with top studios and distributors,” writes the BBC’s Dave Lee. But at the same time, Lee reports, it produced 600 hours of original programming … and it intends to raise that to about 1,000 hours in 2017. Its budget … is $6 billion — a billion more than last year.”

“It’s amazing to think that we launched original programming on Netflix in 2013 and in just four years, our original series accounted for five of the top 10 most searched TV shows of 2016 globally, including ‘Stranger Things’ at #1, according to Google trends,” the shareholders’ letter states.

“DVD subscribers may be fleeing, but the service boasts a library of more than 90,000 titles, including recent films that usually aren’t available to stream for nine to 18 months after they leave theaters — or sometimes at all, at least on Netflix,” the AP’s Michael Liedtke writes in the Portland [Maine] Press Herald.

And it makes an operating profit of 50% on DVD subscription even though the service doesn’t have a marketing budget. In contrast, Netflix spent almost $1 billion last year promoting its streaming service, Liedtke reports.

“During the quarter several of Netflix's original shows including ‘pretty powerful releases’ such as Narcos, Luke Cage, The Crow and Gilmore Girls appealed to viewers globally, said Ted Sarandos, the company's chief content officer, during a conference call Wednesday with analysts,” reports Mike Snider for USA Today. “And new series The 3%, a Portuguese-language release filmed in Brazil, performed well and made ‘Netflix feel a lot more local’ in Latin America, also attracted viewers in the U.S., as well, he said.”

The entire earnings interview by two analysts with Sarandos, CEO Reed Hastings and CFO David Wells is available on YouTube; a transcript of the call has yet to be posted but eventually should be available here.

It may not be as engrossing as Kevin Spacey and Robin Wright in House of Cards — the fifth season of which has been bumped to Q2 2017, Netflix also revealed yesterday — but it tells a tale of market disruption that few imagined just a short time ago.

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