Market Insight

Netflix’s International losses narrow but price increases on the way

April 22, 2014


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Online subscription service Netflix ended Q1 2014 with 11.8 million paying subscribers in its International business. The company added more than 2 million paying subscribers in the quarter, in which there were no new territory launches, a quarterly growth rate of 21%.

International quarterly revenue grew 21% to $267 million with a contribution loss of $35 and a contributing margin of -13%. The contributing loss narrowed by 38 per cent from the $57 million loss experienced by Netflix’s international business in Q4 2013.

In Netflix’s domestic market 2.7 million additional paying subscribers were added to the company’s streaming service, the largest number of net additions since Netflix changed to its current product portfolio in Q3 2011. Quarterly revenue increased by 8% from Q4 2012 to just under $800 million dollars in the quarter. In contrast to the strong growth seen in Netflix’s global streaming subscribers, its DVD by mail business continued its decline ending the quarter with 6.7 million total members, a decline of 4 per cent from Q4 2013. The company’s focus on streaming was further highlighted with Q1 being the first quarter where the business did not partake in any marketing spend for its physical business.

Following the introduction of a new price point in Ireland (from €6.99 to €7.99), the company has indicated that later in Q2 price increases will be introduced across its other international markets of between ‘one to two dollars’, depending  on the individual market. Existing subscribers would not experience this price increase for a “generous time period”, two years in Ireland.

Our Take:

Despite significant growth in both subscribers and revenues in the quarter the international business of Netflix is still subsidised by the domestic streaming and DVD business. However, Netflix’s international streaming business is beginning to gain enough scale to make the shift into profitability. The quarterly loss of $35 million was the smallest it had been since Q3 2011, with losses decreasing by 55% on a year-on-year basis.

The company also indicated that the current international markets (Canada, Latin America, the UK & Ireland, the Nordics and the Netherlands) will become a positive addition to contribution profit in 2014 for the first time in the company’s history.  However, once other ‘shared’ operating costs are included in this calculation, IHS does not believe that the international streaming business will be a positive contributor to the company’s total operating income over the same period.

With the expected launch into new markets in Q3, IHS expects a negative impact on contribution margins starting in Q2 2014. IHS expects that Netflix will enter France, Germany and Belgium in Q3 2014. With territorial expansion needing increased investment in content acquisition IHS expects that from Q2 2014 Netflix’s international streaming margins will be negatively affected. Netflix last launched in multiple new territories in one quarter in Q4 2012 with the company’s launch into four Nordic markets. In both quarters in H2 2012 Netflix experienced a worsening of contribution losses, peaking at $104 million in Q4 2014. Due to the size of the French and German TV markets (significantly larger than the Nordics, which were a key contributor to prior negative margins) IHS expects that the negative impact on Netflix’s margins will be more appreciable.

Despite the company signalling a future price rise in 2014, IHS does not expect any significant downward effect on its growth. Irish customers experienced a one euro  price increase in January 2014, although existing customers received a two year exemption  before their price would increase to €7.99. IHS expects that Netflix’s existing customers in other territories will receive a similar length exemption from the new price-point. 

Given the strong Q1 2014 performance, IHS has revised its international projections upwards and taken into account expected price increases in Q2 2014. Netflix’s international business is now forecast by IHS to end 2014 with 16.7 million subscribers, an increase of 72% from 2013. The three new European markets which IHS expects Netflix to launch in (France, Germany and Belgium) will account for 15% of this growth (1.4m paying subscriber), with Netflix experiencing 57% organic growth. This organic growth is anticipated to be driven by the Nordic markets, in which IHS estimates Netflix will see 1.9 million net additions of paying subscribers over the months to end 2014, to finish the year on 3.3 million subs. The UK and Ireland business is also expected to see significant ongoing growth of 66%, year-on-year, to end 2014 with 3.5 million paying subscribers.

 

Organization
Netflix
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