You may be able to call it a comeback.
Netflix released its 2011 fourth quarter earnings on Wednesday afternoon and they were significantly better than expected: $876 million in global revenue compared to the $857 million that analysts expected, as The Business Insider points out.
That’s great news for the nation’s largest subscription video company, which suffered a dramatic loss of customers in the third quarter after making a series of blunders earlier in the year, including abruptly raising its prices and announcing, then canceling plans to separate its disc-by-mail and streaming video services into two separate companies.
But Netflix had lots to be proud of in its latest quarterly report, saying it experienced “faster than expected” growth in the number of U.S. subscribers to its streaming-only service, up 220,000 new members in the quarter to 21.67 million.
Netflix also reported surprisingly lower costs than analysts had expected, “under-spending in both content and marketing,” as the earnings statement puts it.
Investors were overjoyed with the news, with Netflix stock surging upwards of 10 percent in after-hours trading.
That said, Netflix did caution that the long-term picture is not quite so rosy. The fourth quarter report said the company would be facing intensified competition Hulu Plus and Amazon Prime, as well as breaking the news that we will soon see a new streaming-only Netflix-killer service from Amazon, “at a a price less than ours.”
More to the point, the company said that in the long term, the greatest threat to Netflix’s continued success is the existing cable channels’ new “TV Everywhere” streaming services, such as HBO GO, which allows subscribers to play HBO content on basically any device. As the fourth-quarter report states:
HBO has some great content, particularly their original series, but today for most people it is locked behind a linear interface, or at best, behind a DVR interface and in all cases tethered to a linear subscription plan. As HBO GO grows and becomes the primary way that consumers experience HBO, it will become a much more effective competitor for viewing time. Similarly, Showtime’s TV Everywhere application is very impressive and just starting to gain traction.
Netflix also noted that the number of DVD-by-mail rental subscribers base continues to erode, with the company losing 2.76 million in the fourth quarter alone, “due to the continued impact” of the 60 percent price hike Netflix imposed in summer 2011. The company noted that is causing more customers to choose streaming only over both plans or the DVD plan.
But arguably the biggest challenge for Netflix going forward remains content costs — the prices imposed by the major movie and TV studios for allowing Netflix to license their videos for streaming.
Netflix acknowledged that its failure to re-negotiate an important contract with Starz — which has the rights to Disney and Sony Pictures movies — would have a noticeable impact on the company’s library going forward after the movies disappear from Netflix in February.
But Netflix tried to minimize the impact, saying “the only significant loss” would be “15 Disney output titles, such as ‘Toy Story 3’ and ‘Tangled,’ which currently constitute about 2% of our domestic viewing.”
Further, the company attempted to assure investors it had its content issues under control: “The relationships we’ve established with all major producers of film and TV in the U.S., including multiple output arrangements, ensure a steady flow of new titles to the service.”
So though Netflix is basking in the glow of it’s latest bright numbers, the future remains murky at best for the company. We’ll find out more after the investor conference call, which begins at 6 pm ET.
Carl Franzen
Carl Franzen is TPM Idea Lab's tech reporter. He used to work for The Daily, AOL and The Atlantic Wire (though not simultaneously, thankfully). He's never met a button that didn't need to be pressed. He can be reached at carl@talkingpointsmemo.com.
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