We have a habit at Faultline of pointing out mergers which should happen, but never do. In 2003 we said that Sony should buy Apple soon, before its value went above $10 billion, today Apple could buy ten Sony’s. And last week we said that if Amazon liked LoveFiLM it would love Netflix, which was only worth 10% of its market capital. Will the same transition happen to these two, with Netflix finding success internationally and overtaking Amazon in the next few years?
Just a week after we suggested it, that 10% figure has already changed on the back of stunning Netflix figures that are unequivocal. Netflix now boasts a valuation of 11.15 billion because it has added over 3 million subscribers in a single quarter, more than it added in the entire previous year and any year before, bringing up the total to 7.7 million that it has added this year.
The company confessed that it could only guess that subscriber additions for 2010 would be 3.6 million, but it has added more than double that number, all on the back of its streaming service. And it sums up the outcome in a single sentence ‘ more subscriber growth enables Netflix to spend even more on streaming content ‘ so just how does any rival keep up with the Netflix service offering.
It is anyone’s guess where saturation is for the company, but Netflix already has 20 million paying subscribers, although only around 1 million of these are taking the pure streaming deal which the company introduced in November. The remaining 2 million additions this quarter are to the traditional service which includes DVD rentals through the post, plus online video.
The company said ‘In November last year we introduced our $7.99 per month pure streaming plan, and we increased the prices on our combination plans, which include streaming and unlimited DVD rentals. As you can see from our strong Q1 subscriber guidance, our pure streaming plan has a great deal of consumer appeal. More than one third of new subscribers are signing up for the pure streaming plan, and we expect that percentage to grow over time. The balance of new subscribers primarily takes our $9.99 1-DVD combination plan. Very few of our existing subscribers are downgrading to the pure streaming plan.’
Which pretty much answers all the potential issues. Downgrades would pay less money to Netflix, but then again Netflix would need less DVDs in stock. As it is the company says that it is stocking pretty much the same number of DVDs as last quarter, so the costs of maintaining subscribers has not gone up, while revenues have rocketed to $596 million in the quarter, 34% over this time last year and net income was up to $47 million, a rise of 52%.
Not only does Netflix point out that more subscribers means more money to spend on licensing content, but also that it is the word of mouth of its 20 million customers which are selling the service, so more customers equals more word of mouth. Finally, it plans to spend more on R&D to improve user experience, which it says will drive even more subscriber growth. DVD shipments are now expected to fall in successive quarters, not rise, reducing costs further.
Netflix says that more international launches are dependent upon how quickly Canada approaches profit, and says that it expects to lose $50 million internationally this year as it launches in a second market, which we figure has to be either Western Europe or in the Far East where both Korea or Japan have the online infrastructure too, but have established online video services of their own. We would expect Netflix to chase Amazon into the LoveFiLM territories, so why not start with the UK, perhaps selling through ISPs rather than in competition with them.
Netflix says that if it quickly develops confidence that more international markets can go to profit in a two year time frame, them it will go flat out for launches around the world throughout 2012. It will break the detail of international versus the US out in its figures it promises.