Shares of Netflix (NFLX -6.31%) are flying higher today after the company reported fourth-quarter earnings last night. Investors applauded better-than-expected international subscriber growth, and management made several bold statements about the company's future. Here are the three most important ones.
1. Actually, we do have pricing power
In its third-quarter earnings report, Netflix blamed slowing domestic subscriber growth on its price increase last May from $8/month to $9/month for new subscribers. However, now management is stepping back from its earlier statement, saying, "We now think that the decline in year-over-year net adds would have largely taken place independent of the price change. We've found our growth in net adds is strongest in the lower income areas of the U.S., which would not be the case if there was material price sensitivity."
This statement is the best evidence yet of Netflix's pricing power. Management also said it put through a similar price increase in Mexico and found no slowdown in subscriber growth. Since the "Qwikster debacle" in 2011, when Netflix lost a million customers because it split its DVD-by-mail and streaming services, doubling the price for the combined package. analysts have doubted the company's ability to raise prices. However, as Internet TV has taken off, Netflix's perceived value seems to have increased along with it. The ability to raise prices will be key to the company's future profit growth, and it should allow it to significantly expand margins.
2. Originals were our best idea yet
Many analysts said Netflix was being too risky when it said it would produce its own original shows, but more than two years after the decision, it's clear that that bet has paid off in a big way. Not only have Netflix shows garnered 45 Emmy nominations, but according to the earnings letter, "Last year our original content was some of our most efficient content. Our originals cost us less money, relative to our viewing metrics, than most of our licensed content."
Original shows like Marco Polo are have been a surprising strength for Netflix. Source: Company Facebook page.
Netflix is increasingly staking its brand on its own hit shows like House of Cards and Orange is the New Black, which did not exist two years ago. Even Marco Polo, which was panned by critics, performed well with Netflix viewers, earning a 93% rating on Rotten Tomatoes.
The strength of the company's original programming not only increases its brand strength, but also gives management more control over expenses, as studios generally hold the leverage in content licensing negotiations. Exclusive shows also add a competitive advantage over other entertainment providers.
This year will be Netflix's biggest in terms of original content. The company will launch 320 hours of in-house material, some of it featuring big names like Tina Fey and Adam Sandler. As the company's subscriber base expands, the platform's appeal to stars like Fey and Sandler should only grow, making it even easier to develop such content in the future.
3. We're taking over the world, baby
Following its expansion to several countries in Europe last September, Netflix's next stop on its international tour will be Australia and New Zealand in March. Though international expansion has been brisk thus far, the company shocked everyone when it said, "Progress has been so strong that we now believe we can complete our global expansion over the next two years," growing from just about 50 countries to 200. Management also said it expects to generate material global profits from 2017 on, and it will launch in additional major countries later this year.
With the penetration rate of broadband and other Internet-enabled technologies increasing quickly around the world, the market for Internet TV should ramp up, and it's to Netflix's advantage to be a first mover wherever it can be. The streamer's ability to complete its global expansion sooner than expected is also a reflection of the success of expansion in initial foreign markets, which are now profitable, and improvements in content licensing agreements, as the streamer has made several deals with content providers for global distribution.
Many American brands have found as much, if not more, success abroad, and Netflix should follow in those footsteps. TV and movies are universally popular, as is the convenience of choosing when and where you watch them. Early results have also shown the crossover popularity of both original and licensed content.
As the domestic market matures, international growth will increasingly dictate Netflix's success. The growing popularity of Internet TV as well as the spread of the technology that makes its possible should ensure continued growth from foreign markets. Like Marco Polo a thousand years before, Netflix looks poised to bring back bountiful treasures from its ventures abroad.
