Netflix Poised to Pass HBO in Paid U.S. Subscribers; “We have more content, much more viewing per member, a broader brand proposition, are on-demand, on all devices, and are less expensive”

Netflix Poised to Pass HBO in Paid U.S. Subscribers

By Cliff Edwards – Oct 21, 2013

Netflix Inc. (NFLX) is poised to pass HBO in paid U.S. subscribers, showing Chief Executive Officer Reed Hastings is making progress toward a goal of transforming the streaming service to a Web-based television network. Netflix, based in Los Gatos, California, reports third-quarter results today after markets close. Already the world’s largest subscription-video service, the company probably reached 30 million paying U.S. customers as of Sept. 30, according to Needham & Co. HBO, Time Warner Inc. (TWX)’s premium cable-TV network, has about 28.7 million, according to researcher SNL Kagan.Hastings has hooked viewers with the Emmy-winning original series “House of Cards” and a library of films and TV shows. To fuel more growth, Netflix is looking to bring its Web-based service to cable-TV systems. Cable providers are starting to see the $8-a-month subscription as an asset, and some are working to integrate Netflix with traditional programming.

“Consumers are probably going to come to see Netflix as being more valuable than other networks,” said Tony Wible, an analyst at Janney Capital Markets in Philadelphia. The monthly price “makes it very difficult for others to be in the business.”

Netflix is in talks with U.S. cable providers including Cox Communications Inc., Suddenlink Communications, RCN Telecom Services and Atlantic Broadband Finance LLC, people with knowledge of the situation said last week.

Including free trials, Netflix’s U.S. subscribers probably reached 31 million in the third quarter, the average of eight analysts’ estimates compiled by Bloomberg. That’s an increase of about 4 percent from 29.8 million as of June 30. Paid users were 28.6 million in the second quarter.

HBO’s Path

Analysts project profit, excluding some items, rose to 63 cents a share from 13 cents a year earlier, on sales that grew 21 percent to $1.1 billion.

To reach Hastings’ goal of becoming a Web-based TV network, Netflix is following HBO’s path. Thirty years ago, HBO aired its first original movie, a 1983 biopic of Canadian amputee and runner Terry Fox. Like HBO, Netflix has used original programming to build customer loyalty and to stand out from competitors such as Amazon.com Inc., the largest Web retailer, Hulu LLC and Redbox Instant by Verizon.

Hastings has called “House of Cards,” which won the Emmy for director David Fincher, “Orange Is the New Black” and other originals integral to his strategy of moving from reruns to a mix of Hollywood movies and new shows. Sony Pictures Television will produce a psychological thriller for Netflix, the company said on Oct. 14.

More Use

Currently, these shows are funneled to televisions through users’ video-game consoles or standalone devices such as Apple TV or Roku Inc.’s Web-connected box. Viewers can also watch on their smartphones or tablets. Adding Netflix’s application to cable menus will make it easier for customers to watch, Wible said.

“There’s nothing to stop somebody who has a cable plan today from getting Netflix, but people will use it a lot more if it’s integrated into the set-top box,” Wible said.

Netflix rose as much as 4.7 percent today from an all-time closing high of $333.50 on Oct. 18. The shares added 3.5 percent to $345.32 at 10:21 a.m. in New York, after reaching an intraday record of $349. The stock has almost quadrupled this year, the largest gain in theStandard & Poor’s 500.

Investors are also looking for Netflix to spur international growth. Hastings has suggested the company, which had 37.6 million viewers worldwide as of June 30, can reach 60 million to 90 million over time. If the company can reach domestic and international targets this quarter and next, it could reach 43.8 million by the end of this year, and cement views that subscriptions can reach at least 50 million, said Scott Devitt, an analyst at Morgan Stanley. (MS)

Pricing Policy

Devitt, who rates Netflix equal-weight, estimates the company added 2 million total subscribers in the third quarter and projects an additional 4.2 million in the fourth quarter.

Even should the company meet its growth targets, some analysts caution that unless Netflix raises prices and adjusts policies that make it easy to quit the service, it will be harder for Netflix to generate ongoing profit.

With tiered pricing, where people who stream a lot pay more, Netflix’s model might be more sustainable, said Laura Martin, an analyst with Needham & Co. who rates the stock buy and projects the shares will reach $425.

“The more hours a household watches Netflix, the faster Netflix’s value proposition falls, and the lower the probability of renewal the next month,” Martin said.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

Netflix Sign-Ups Beat Estimates as U.S. Total Surges

Netflix Inc. (NFLX) reported third-quarter profit that beat analysts’ estimates and added U.S. customers faster than projected as the video-streaming service passed HBO in paid domestic subscribers. The shares surged.

Profit increased fourfold to 52 cents a share, Los Gatos, California-based Netflix said today on its website, beating the 47-cent average of 27 analysts’ estimates. Including free trials, domestic users rose 4.3 percent to 31.1 million from the second quarter, surpassing the 31 million average of eight estimates compiled by Bloomberg.

The results suggest Netflix’s Web-based service has growth potential beyond that of premium cable-TV networks. Chief Executive Officer Reed Hastings is offering a mix of original programs like “Orange Is the New Black” and unlimited viewing of movies and TV shows for $7.99 a month. He has begun talks to bring Netflix to cable-TV systems in the U.S., after reaching initial deals in Sweden and the U.K.

“We have more content, much more viewing per member, a broader brand proposition, are on-demand, on all devices, and are less expensive” than HBO, Hastings said in a letter to shareholders. The company estimates it can reach 60 million to 90 million domestic streaming members, he wrote.

Netflix surged as much as 12 percent to $396.98 in extended trading after the results. The stock rose 6.4 percent to an all-time high of $354.99 at the close in New York and has risen almost quadrupled this year, for the biggest gain in the Standard & Poor’s 500 Index.

Raising Capital

The company expects to double its investment in original content next year, Hastings said, and may raise money to pay for it. Netflix also said it’s changing the accounting for shows that premiere on its service, which will result in costs being recorded sooner.

“Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of original content,” Hastings wrote.

Third-quarter net income jumped to $31.8 million from $7.68 million, or 13 cents a share, a year earlier.

Sales increased 22 percent to $1.11 billion from $905.1 million a year ago, beating estimates of $1.1 billion.

Hastings has hooked viewers with original programs such as “Orange Is the New Black,” which began streaming during the quarter, and the Emmy-winning “House of Cards.” The company has also reached deals to get exclusive movies from Walt Disney Co. (DIS) and DreamWorks Animation SKG Inc. (DWA)

Owning Shows

The company is becoming “more comfortable” with owning original shows, rather than licensing them for set periods, Chief Content Officer Ted Sarandos said in a video interview after the results. Originals build interest in the service and are gaining audiences over time, he said. The company is actively looking to produce original movies, he said.

While press coverage of the Emmys and “Orange Is the New Black” has spurred subscriber growth, a bigger percentage of Netflix viewing is generated by full-season reruns of shows such as “Breaking Bad,” “The Walking Dead” and “Pretty Little Liars,” Hastings wrote.

The company also began service in the Netherlands, helping bring its international subscriber total to 9.19 million. Netflix projected total users may reach 43.6 million in the fourth quarter, including 10.5 million outside the U.S.

Next year the company will spend about $500 million to market the service around the world, Hastings said.

In the U.S., paid subscribers totaled 29.9 million,, Netflix said. That’s an increase from 28.6 million as of June 30, and puts Netflix ahead of HBO, Time Warner Inc. (TWX)’s premium cable-TV network, which has about 28.7 million, according to researcher SNL Kagan.

HBO Competition

Hastings said he regards HBO as Netflix’s closest U.S. competitor, and is following the older network’s path. Thirty years ago, HBO aired its first original movie, a 1983 biopic of Canadian amputee and runner Terry Fox. Like HBO, Netflix has used original programming to build customer loyalty and to stand out from competitors such as Amazon.com Inc., the largest Web retailer, Hulu LLC and Redbox Instant by Verizon.

While the number of streaming subscribers is growing, the DVD business, which shrank 4.8 percent sequentially, “is declining more rapidly than we expected,” said Michael Pachter, an analyst with Wedbush Securities, who rates the stock “underperform.”

“The valuation makes no sense at all,” Pachter said.

(Netflix held a video interview today. A replay can be seen at the company website http://ir.netflix.com/events.cfm)