Netflix gained over 5 million paid subscribers or ‘members’ in the first quarter of 2015, beating its own forecast. It has over 40 million in the United States and over 19 million internationally. Between them they streamed 10 billion hours of video in three months. The chief executive of Netflix says that internet television will replace linear television over the next twenty years. But is Netflix really television, or is it online video, and will it end up as being one app among many?
Netflix passed the 60 million mark in terms of total streaming members, but the number of paid subscribers was just under that at 59.62 million. That is a year on year increase of 13.48 million paid members.
In the first quarter of 2015 Netflix gained 2.62 million paid members in the United States and a further 2.52 million internationally. Its internal forecast is to add 2.85 million in total over the next quarter, which appears cautious but less likely to disappoint investors.
If anything, we can expect an even larger increase in international numbers, following its recent launch in Australia and New Zealand. Netflix aims to launch additional international markets, starting with Japan, a country with over 35 million fixed and around 150 million wireless broadband subscriptions.
Netflix is keen to point out that it is not only growing subscribers but also engagement, in terms of hours viewed. In the first quarter of 2015 it reported 10 billion hours streamed, up from 4 billion in the same period two years previously. Consumption is high in the United States but is apparently not the highest across the markets Netflix serves.
On average, it works out at approaching 13 hours a week of viewing per subscribing account, which could be across a whole household, or potentially beyond the household given the possibility of account sharing. It is certainly significant, even in the context of around 35 hours a week of television viewing per individual on average in the United States, or approaching 90 hours per household. It puts Netflix viewing on a par with some of the main television networks.
With total streaming revenues of $5.07 billion over a year, average revenue is just over $85 a year per subscriber. While revenues are reinvested in programming and international expansion, Netflix only delivers a net income of $237 million over the year. Compare that with Comcast, with annual revenues of $68.76 billion and an operating income of $14.90 billion.
The Netflix user interface will be enhanced in the second half of the year, bringing video into the browsing experience, which currently consists of static images. There will also be a move to secure protocols for both browsing and viewing, apparently to prevent tracking by service providers or employers.
Netflix has also changed its terms to discourage use of virtual private networks to access its service from other markets, which it says is very hard to detect. As it continues its international expansion it expects this to become less of an issue.
The company has restated its commitment to strong net neutrality, and welcomed the actions of the Federal Communications Commission in the United States. However, it appears to have regretted participating in programmes with service providers in Australia to exclude its services from data caps. It said: “We should have avoided that and will avoid it going forward.” It may also be regretting doing deals with companies like Comcast and is certainly lobbying against its acquisition of Time Warner Cable.
With respect to the recent launch of HBO Now in the United States, it said that Netflix and HBO are not substitutes for one another. It also views multichannel services, such as Sling TV from Dish, Playstation Vue from Sony, and a rumoured offering from Apple, as more competitive to pay-television than Netflix, which is lower cost, has exclusive and original programming, and is not focussed on live television.
“Linear TV has been an amazing 50 year run. Internet TV is starting to grow. Clearly, over the next 20 years, internet TV is going to replace linear TV,” Reed Hastings, the chief executive of Netflix, told investors. “Internet TV is the way that people will consume video in the future.”
He described Netflix as a “learning machine” — learning what works country by country. “Internet tv is growing around the world at incredible rates so were really propelled by that macro trend.”
Whether people view Netflix it as internet television or online video is another matter. Netflix is aiming to create a global subscription platform for programming delivered on demand. The original and library programming that Netflix delivers caters for only part of broader schedule that is provided by television.
The beauty of the Netflix business model is that it only has to deliver enough value to justify its relatively low monthly subscription per household in order to be a successful global media business.
The market capitalisation of Netflix continues to rise on the basis of investor confidence. The company is now valued at approaching $35 billion, compared to Comcast at over $145 billion.
However, television remains a very big business and service providers are starting to counter the Netflix model with their own offerings. If apps are replacing channels, as Netflix believes, it may end up being one app among many.