Netflix Profits Up on Sub Gains

LOS GATOS: Netflix saw its first-quarter profits almost double to $60.2 million, on revenues that gained 46 percent to $718.55 million.

The company reported 3.3 million net subscriber additions in the U.S. in the period, a 94-percent year-on-year gain. Including its Canadian base, the company has a total of 23.6 million customers, a 69-percent gain on the year-ago quarter.

In a letter to shareholders, CEO Reed Hastings and CFO David Wells said that the company expects to continue migrating from being a DVD outlet to being a streaming media firm. "We believe that DVD will be a fading differentiator given the explosive growth of streaming, and that in order to prosper in streaming we must concentrate on having the best possible streaming service. As a result, we are beginning to treat them separately in many ways. Already, if you look at our signup page for non-members, it is all about streaming. Having said this, DVD rental is still a great business for us, and we are working on solutions to make sure DVD continues to be a profitable business for us in the years ahead, but it is not core to winning in streaming at this point."

On the streaming-media front, the executives hailed Netflix’s deals with all four broadcast networks, plus several cable outlets. It noted its pacts with Fox and Lionsgate that cover the off-net rights to five on-air shows, including Glee, Sons of Anarchy and Mad Men.

TV shows and feature films are "being enjoyed in nearly equivalent volume by our subscribers," the letter to shareholders notes, "and our content acquisition team is focusing their attention accordingly."

The letter also notes the importance of the exclusive deal for Media Rights Capital’s House of Cards. "Rather than a shift in strategy towards original programming, our decision was driven by a desire to test a new licensing model using a small portion of our content budget," the letter states. "Serialized dramas, like the original BBC series on which House of Cards is based, have been big favorites on Netflix and we want to confirm our theory that because we are click-and-watch rather than appointment viewing, we can efficiently build a big audience for a well-produced serialized show. This represents slightly greater creative risk than we’ve taken in the past, but we think it’s reasonable given the popularity of the original BBC show on Netflix and the modest percentage of our content budget it represents. If House of Cards” is popular enough on Netflix so that the fee we’ve paid is in line with that of other equally popular content on Netflix at the time, we’ll consider it a success. Ideally, we’ll license two or three similar, but smaller, deals so we can gain confidence that whatever results we achieve are repeatable."

Discussing the international business—with 800,000 subs in Canada—the letter from Hastings and Wells notes that the company will report operating losses of $50 million to $70 million in the second half following this expansion, "which we are comfortable with given the size of the opportunity." Another market will be added in early 2012, Netflix says.