International Expansion, Slow Subscriber Growth Drag Netflix's Profit Down

In the U.S., the number of streaming subscribers increased by 530,000, falling short of Credit Suisse's 600,000 estimate. However, Netflix also lost 850,000 DVD-only subscribers. DVD sales are expected to "decline in every quarter" for the foreseeable future, the company's Founder and CEO Reed Hastings told the Wall Street Journal, adding that he expected it to last another decade. Overall, the company added 979,000 subscribers, including 560,000 international users — a figure Morningstar called "weak" — totaling 30.1 million worldwide.

 

International expansion is proving to be expensive, with Netflix reporting a $89 million loss from its global business. "We think the company is spreading itself too thin and international expansion will generate losses for much longer than the management team believes," Morningstar analyst Michael Corty wrote in a report. But Hastings insists that his company is seeing increasing engagement, and that Netflix has improved on losses from Q1. "I think it's the ability for us to demonstrate the growth in those markets quickly and in the engagement in those markets that gives us the confidence that we can [profit]," Hastings added.

 

Hastings also alluded to working with HBO in a letter to shareholders. "While we compete for content and viewing time with HBO, it is also possible we will find opportunities to work together – just as we do with other networks." This surely sounds like great news to fans of the premium network. But when pressed by an analyst during the earnings call, Hastings retreated. "I'm not sure what we would do. My point is that we’re just another network and that when you have multiple networks, they often find ways of working together. So it's a general point that it's not a zero-sum game between HBO and Netflix. That, in fact, there may be ways of working together, but there is nothing particularly pressing." An HBO spokesman shot back when the press asked about the potential partnership: "We are not in discussions and have no plans to work with Netflix." (Ouch.)

 

Looking ahead, Netflix expects the Olympics to "dampen acquisitions across all of [its] markets." Powering ahead with global expansion, the company expects its international subscriber base to exceed 4 million. Netflix is also bullish on original programming. "We've been very happy relative to the investment on 'Lilyhammer,' and so we're feeling quite good about the rise of 'Arrested Development' Season 4, 'House of Cards' and our other originals," Hastings said in the earnings call. "House of Cards," which began filming in April, is on schedule to premiere early 2013. The highly anticipated "Arrested Development" will debut after "House of Cards." The company's first original show, the Norwegian "Lillyhammer," will be back for a second season in 2013.