By Austen Hufford
Netflix Inc.'s wagers on original programming and international
expansion are paying off as the streaming service again posted
strong subscriber growth amid an increasingly competitive streaming
video market.
The Los Gatos, Calif., company ended its third quarter with 104
million paid streaming subscribers globally. It added 5.3 million
streaming users in total, outpacing the 4.4 million net additions
it had projected.
Netflix has been pouring money into original programs such as
"Stranger Things" and "The Crown" to fend off competition from
other streaming services and continue to attract new subscribers
around the world. The company now says it plans to spend as much as
$8 billion on content next year -- up from an earlier estimate of
$7 billion -- far outstripping the investments expected from rivals
Hulu, Amazon.com Inc. and HBO.
Revenue increased 30% to $2.99 billion in the third quarter,
slightly topping analysts' estimates, and the company's operating
margin expanded.
Shares in Netflix rose 1.2% in after-hours trading Monday. The
stock has gained 64% this year though Monday, giving the company a
market value of about $87.5 billion.
The company said it now has $17 billion in streaming-content
obligations, a measure of current and future costs for content
acquisition, licensing and production, an increase from $14.4
billion in the same quarter last year.
Competition for viewers' attention has been getting more fierce.
Some content owners, such as Walt Disney Co., are planning to offer
their own streaming services, pulling some content from Netflix.
Amazon, meanwhile, is boosting its own spending to lure talent and
create original shows. Hulu took home best drama at this year's
Emmy Awards for "The Handmaid's Tale" -- becoming the first
streaming service to win the coveted prize. New competitors are on
the horizon, with Apple looking to spend roughly $1 billion to
procure and produce original content over the next year.
In a letter to shareholders, Netflix said the "long-term trends
are clear" that the company's "future largely lies in exclusive
original content," and less on licensing programs from other
content suppliers in Hollywood. Netflix said more than one-quarter
of its content spending will go toward original content this year,
an amount that could eventually reach more than 50%..
"It's an exciting period, and both media and technology
companies see the same big opportunity as we do," Netflix said in
the letter. "We have a good head start but our job is to improve
Netflix as rapidly as possible to please our members by earning
their viewing time and to stay ahead of the competition in the
decades to come."
In response to more competition, Netflix has increasingly
focused on signing creative talent and owning its own production
and intellectual property.
"You can't just be a middle man between the viewer and the
network," said Jonathan Hadad, a research analyst at IBISWorld.
"You have to be the network."
Netflix recently signed Shonda Rhimes, the creator of ABC hits
including "Grey's Anatomy" and "Scandal," to a multiyear exclusive
agreement to develop shows for the streaming service.
"It gets very competitive for the handful of superstars, but
overall player personnel costs are pretty predictable," Netflix
Chief Content Officer Ted Sarandos said on a video chat with an
analyst, using a sports metaphor to refer to how Netflix is able to
manage content costs. The company also said that in recent years
revenue has grown faster than its content budget.
Netflix in August announced its first acquisition, buying
comic-book publisher Millarworld to gain access to production and
intellectual property such as "Old Man Logan." On Monday, the
company said it would look at deals through a creative and content
lens and not as a way to diversify its business.
Netflix has been aggressively pursuing global expansion as its
core U.S. market matures and as it works to offset growing content
costs and original programming investments.
The company added 4.45 million international subscribers in the
quarter, compared with its forecast of 3.65 million. It added
850,000 U.S. subscribers, compared with its target of 750,000.
Netflix's faster-than-expected growth is notable as traditional
pay-television distributors feel the impact of cord-cutting and
customers downgrading to less-costly packages of channels. Concerns
ramped up in recent weeks when AT&T Inc. warned that it lost an
estimated 390,000 traditional TV customers in the latest quarter --
more than offsetting nearly 300,000 new accounts for its DirecTV
Now streaming service. Comcast Corp. has also said it expects to
lose subscribers in the third quarter, in part because of customers
ditching cable for online substitutes.
Meanwhile, Netflix has increased its promotional activity. In
September, T-Mobile US Inc. started offering new and existing
family-plan subscribers free access to Netflix. The company also
said it plans to increase its marketing spending in the current
quarter, which will cut into margins.
The high-octane business model puts pressure on Netflix to
continue to add subscribers, and periodically raise its prices --
especially if the streaming giant hopes to increase what until now
have been relatively narrow profit margins.
The company's operating margin came in at 7%, compared with its
estimate of 6.9%. The fourth quarter is on track for 7.3%, the
company said.
Netflix has indicated to Wall Street it would like to be judged
more on its revenue and global operating-profit margins than
metrics such as subscriber additions. But subscriber growth has
continued to remain a focus for investors.
Earlier this month, the company said it would raise prices for
its U.S. streaming-video customers, betting that subscribers will
tolerate higher monthly fees and help fuel the company's big
investments in TV shows and movies. Because the price increase was
announced after the quarter ended, the impact won't be reflected in
results until the fourth quarter.
With the increased prices, the company expects to gain 1.3
million subscribers in the U.S. in the fourth quarter, down from
the 1.9 million added in that quarter last year. Abroad, it expects
to add 5.1 million.
Netflix posted a third-quarter profit of $130 million, or 29
cents a share, compared with a profit of $52 million, or 12 cents a
share, in the same quarter last year.
Analysts surveyed by Thomson Reuters had projected earnings of
32 cents a share on $2.97 billion in revenue.
Write to Austen Hufford at austen.hufford@wsj.com
(END) Dow Jones Newswires
October 16, 2017 19:52 ET (23:52 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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