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Netflix Will Be Profitable in the Long Run

By Mark Girland – Feb 24, 2014 at 9:11AM

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Many claim that elevated content costs will make Netflix’s business unprofitable in the long run. Is this plausible? How might Apple and Amazon impact Netflix's profitability?

Many bears claim that elevated content costs will make Netflix (NFLX -2.25%) unprofitable in the long term. However, multiple factors seem to indicate otherwise. For example, Netflix appears ready to launch new markets internationally, and the company is also planning to broaden its strategy by providing multiple streaming services for different prices to maximize income. Netflix will also continue developing original shows.

The International segment will prove an asset
There are indications that Netflix is ready to launch new markets in Latin America, Nordic countries, Ireland, the United Kingdom, and Canada. In the U.K., broadband Internet connections using fiber optic or cable were used by 42% of households, up from 30% in 2012. Nordic countries dominate broadband Internet connection access rankings, with all five Scandinavian countries ranking in the top 10. Canada improved marginally since the previous survey, moving from 10th place to 9th. According to the Central Statistics Office, 81% of people living in Ireland now have access to the Internet at home.  Latin America has more than 50 million households with access to broadband Internet connections. At a 20% annual growth rate, Netflix should significantly grow its international subscriber base in the next few years.  

Different prices will boost revenue
Netflix wants to broaden its operations by offering streaming services at different prices. Users would have a choice to service levels to accommodate multiple budgets and usage needs. This move should serve to maximize Netflix's revenue and gain new customers by catering to the varying needs and capabilities of consumers. Netflix added more than 2 million new domestic subscribers in the fourth quarter, bringing its total U.S. subscriber base to more than 33 million. Netflix's original forecast called for 1.6 million-2.4 million new customers. Clearly, the company has a room to increase its number of subscribers. If it maximizes its income through the implementation of new service plans, Netflix's revenue should rise without affecting content costs.

Building a strong fan base
Netflix had phenomenal success developing original shows last year, and the company is building on that tradition. Ultimately, this strategy will have an impact on the company's streaming revenue. In the U.S., multichannel video programming distributors have remained stable at 100 million subscribers. Netflix has slightly more than 30 million domestic customers, which suggests there is room to improve its margins. The development will have a positive impact on the company's profitability.

Amazon (AMZN -3.03%) recently licensed programs from Viacom in an effort to become a major competitor to Netflix. The company added TV shows from Viacom's networks to the Prime Instant Video service, which brought the number of movies and TV shows available to around 15,000, up from 13,000. Amazon has also given the green light to five original series. The number of U.S. digital TV viewers will reach 145.3 million in 2017, up from 106.2 million in 2012, according to eMarketer. Amazon is clearly motivated to improve its streaming content to gain a significant share of the market.

Apple (AAPL -2.54%) is planning to introduce a new AppleTV set-top box. This move seems to signal Apple's new-found aggressiveness regarding the TV and video streaming sector. According to Juniper Research, the 2017 revenue from streaming and download services on mobile TV and tablet devices will reach $9.5 billion, up from $4.5 billion this year. This will be a result of the maturation of the market for streaming subscription services and pay-per-title content. Apple is interested in gaining a share of that revenue.

Foolish bottom line
The bears who believe that elevated content costs will make Netflix's business unprofitable over the long term are simply incorrect. The launch of new markets will significantly expand the company's international subscriber base. Netflix's plan to provide streaming services at different price points will maximize income in the near future. The company's intention to continue developing original shows should also improve its bottom line in the long run. 

Mark Girland has no position in any stocks mentioned. The Motley Fool recommends, Apple, and Netflix. The Motley Fool owns shares of, Apple, and Netflix. 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.

Stocks Mentioned

Apple Stock Quote
$142.91 (-2.54%) $-3.72
Netflix Stock Quote
$305.56 (-2.25%) $-7.03 Stock Quote
$88.25 (-3.03%) $-2.76

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