Streaming online video service provider Netflix saw a 33 per cent increase in paying International subscribers in the fourth quarter of 2012. The company ended the period with 4.892m paying subscribers internationally, with a further 1.229m users on free trials. Netflix launched services in the Nordic countries in October 2012.
Despite the strong growth in subscribers internationally, losses grew for the international streaming division to $104.8m in the quarter, to total $389.3m for full-year 2012. This was driven by a $151m cost of revenues in Q4, largely due to increased costs relating to content acquisition across the wider international customer base. International revenues for the quarter rose 30 per cent to $101.4m and are nearly four times the size of Q4 2011 revenues (although the service has launched in six new territories during 2012).
The company has indicated that it has no further plans to expand into new territories in H1 2013, although may consider expansions into new markets in late 2013 or 2014.
Netflix's International results present a story of two conflicting elements. A significant increase in its subscriber base tempered by the company's largest ever loss internationally. However, this loss needs to be placed into context - with content acquisition costs increasing as territorial expansions occur.
When we look at the contribution loss for international streaming per paying subscriber we see a more subtle underlying trend. In the previous five quarters this metric has been decreasing from a high of $41.29 in Q4 2011, to $21.43 in the most recent quarter. This trend has helped the company move its total (US plus International) streaming subscriber base into a small profit, $4.48m in the quarter, with the domestic streaming business making $4.44 in Q4 2012 per paying subscriber.
We expect the financial situation to improve further in the first half of 2012 for the international streaming business. The company is holding back on new territory launches for the short-term, which will help keep per-subscriber costs low. Nonetheless, competition remains intense in its European markets, and as local pay TV services and OTT operators bolster their content portfolios, Netflix will almost certainly have to respond in kind. One advantage for Netflix is the build-out of its Open Connect CDN, which will help keep costs low as its user base and video consumption scales. Few local European providers have yet to explore developing their own CDN services.
During 2012, Netflix entered into six markets in Europe, where the company has faced a more competitive environment in rights acquisition. The huge investment Netflix has made in International rights has paid dividends, with subscriber growth reaching 238 per cent year-on-year. If we remove the new markets added in 2012, IHS Screen Digest estimates that Netflix's paying subscribers grew organically by 118 per cent in 2012 to 1.6m paying subscribers in Canada and 1.5m in the Latin America region.
Of the six new markets that the company entered in 2012 IHS Screen Digest estimates that the UK & Ireland service had a combined 1.4m paying subscribers at year end 2012, 80 per cent the level of Sky Go's active monthly user base. We understand that the Nordic region's first quarter since launch saw strong growth with an estimated 0.4m paying subscribers by the end of the period and IHS Screen Digest forecasts that the region will have 1m paying subscribers at the end of Q4 2013.