In its earnings call following last night's Q3 2013 earnings release, Netflix (NASDAQ:NFLX) and its CEO Reed Hastings fielded questions from analysts about the crucial issues facing the streaming service, and discussed five crucial points that will shape the company's future.
1. Streaming is the new cable
Netflix subscribers streamed about 5 billion hours of video worldwide this past quarter – up about 25% since Q1. And while most new TV shows tend to lose viewers after their first few weekly episodes, Netflix reports steady growth in viewership for its original series. The company would probably say that's an argument in favor of releasing entire seasons all at once.
The company also says it's pretty much successfully transitioned from being a DVD brand to a streaming brand, compared to the struggles of competitors Amazon.com's LoveFilm in the U.K. and Outerwall's Redbox in the U.S. Even though its attempt to spin off and rebrand its DVD service a few years back proved disastrous (*cough* "Qwikster" *cough*), Netflix has still remade itself as a streaming site by marketing those services more heavily, and earning buzz for its original content.
2. Netflix wants to hold all the cards
Going forward, Netflix wants to get more aggressive about owning more of the rights to its original content. With House of Cards, the company decided to hedge its first big bet on original content by only paying for first distribution rights for the series. Management didn't know how successful it would be, and they didn't want to have too much capital tied up in the series in case it went sideways.
As a result, the Emmy-winning political drama's now available to rent on DVD from Redbox, which isn't paying Netflix anything for the privilege. Now, the company says, it'd be "much more comfortable" making a bigger investment to have more control over its content.
It'll need that control, and that content, to surpass what Netflix views as its big competitor: HBO. Even though it now has more domestic subscribers than HBO does, the company says it'll still take several years to overtake HBO's current total global subscriber count of 114 million.
3. Sorry, sports fans
HBO may want to worry, but ESPN can rest easy: Netflix is still uninterested in doing live sports. The company says it doesn't fit its business model at all (all-you-can-view, on-demand video, one low price ).
4. Let my bandwidth go
During the call, one analyst asked about Liberty Media CEO John Malone's comments at his company's June annual meeting, in which Malone envisioned broadband companies charging content providers fees to send data through their pipes. In response, Netflix CEO Reed Hastings said that such a model would be unsustainable.
Basically, Hastings is saying, trying to get content providers to pay for the right to have their data delivered would reduce the amount of content available online. And Internet service providers wouldn't be able to charge their customers $40 to $60 a month for broadband if those users couldn't find any content they wanted. A lack of content would thus drive customers away from cable companies and other Internet providers.
In other words, the Internet has grown so much, so quickly because of net neutrality, where all bits that travel through its wiring get treated the same. He believes that this will continue to hold true, since Internet providers like Liberty won't want to shoot themselves in the collective foot.
5. The future lies with broadband abroad
However the U.S. broadband market might change, Netflix plans to keep rolling out its service internationally, most likely into some of the bigger-bandwidth markets. Right now, it's only available in three of the world's top 10 broadband-equipped countries. And the company continues to view international as the bulk of its business down the road. Like other Internet companies, it expects to eventually get 70% to 80% of its revenue from abroad. Better yet, Netflix is now talking about sustained global profitability, rather than cycling between breaking even and losing money as it expands into new international markets.
Most importantly, Netflix believes it'll have enough cash to carry out those and other ambitious growth plans. The company says it doesn't feel capital-constrained, which means to me that it's generating enough cash to do what it wants and grow at a pace at which it feels comfortable.
Jim Mueller owns shares of Netflix and Amazon.com, and has the following options: short January 2014 $330 calls on Netflix. The Motley Fool owns shares of Amazon.com 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.