How Netflix Acquired Over 2 Million U.S. Customers Last Quarter

Learn why Netflix continues growing its user base at an amazing space, despite having already over 44 million members.

Jan 27, 2014 at 10:00PM

Netflix (NASDAQ:NFLX), one of the world's largest providers of on-demand Internet television with over 44 million members, released its earnings for the fourth quarter of 2013 on Jan. 22. It was definitely another great quarter for the company, which reported full year net income of $112.4 million, almost $10 million above the Street consensus. The company's $4.4 billion full year revenue figure was in line with expectations.

However, the most interesting news regarding Netflix's latest earnings is that the company added 2.33 million paying customers in the U.S., way above the Street consensus of 2 million customers. Moreover, Netflix also added 1.7 million international subscribers. Netflix's user base growth is simply amazing, specially if we consider that competition for the Internet television market is fierce, with's (NASDAQ:AMZN) Prime service and Hulu also competing to capture market share. In this difficult context, how did Netflix manage to acquire almost four million customers worldwide in a single quarter?


Source: Statista, Mashable, Pricewaterhouse Coopers

It's all about differentiation
To continue growing its user base in a competitive environment, Netflix is trying to differentiate its service as much as possible. At first, Netflix's differentiation strategy was based on acquiring as much exclusive content as possible.

Eventually, Amazon and Hulu started bidding up the price on library content in order to avoid losing market share. As a result, it's getting more expensive to obtain great content, as it can be seen from Netflix's weak profitability. Despite seeing more than $1.1 billion in revenue in the last quarter, the company only managed to convert $5 million into free cash flow.

Aware of the urgent need of an extra edge to remain competitive, Netflix started creating its own content. And the results have been very impressive. So far, Netflix's series have received over 80 major award nominations and wins, including the Emmy and Golden Globe awards for House of Cards, Orange is the New Black, Arrested Development and Hemlock Grove.

The company is producing original documentaries -- The Short Game, rated 7.6 on Internet Movie Database -- and partnering with famous studios like DreamWorks Animation to develop original animated series for children, such as Turbo F.A.S.T, which is on track to become one of the most popular kids series ever on Netflix. 

As a way of adding more value to its membership, Amazon is providing perks like free two-day shipping on all Amazon purchases, and the ability to rent selected books for Kindle for free. The service also allows users to download, rather than just stream, certain videos. However, in the long run, the ability to consistently create great content may become the best way to achieve differentiation.

From now on
Netflix still has plenty of room left for future growth, as over the coming decades Internet TV is expected to replace traditional TV, growing from millions to billions. Moreover, Internet penetration and broadband speed should continue to increase in emerging markets. This will expand Netflix's addressable market.

The company has been operating its business nearly at a loss, as it invested heavily in content, software improvements, and marketing. However, a shift from top-line performance to earnings is expected. To improve profitability, the company is getting ready to overhaul its pricing strategy. For example, early in 2013, the company started offering its members the option to stream to two additional devices at a time, for an extra $4 per month.

Final Foolish takeaway
Despite already being the world's largest subscription streaming service, Netflix continues delivering amazing user base growth figures, thanks to a well-thought differentiation strategy based on creating top-quality, original content, sometimes in cooperation with famous studios.

The company is a must-watch, as it could benefit enormously from a global shift to Internet TV, which is expected to replace traditional TV in the long run. However, it's also important to pay close attention to the effects of legislation changes and modifications of pricing strategy on user growth.

Could these stocks be the next Netflix or Amazon?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently, one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his six carefully chosen picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Click here to add Netflix to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information