Online video streaming service provider Netflix (NFLX) had a mixed start to the fiscal year 2014.. The company’s bottom line overtook Street estimates, and top line was satisfactory too. Though growth looks solid, rising competition in the home market, increasing content cost, and sluggish DVD business happens to be troubling Netflix Let’s find out how the company plans to fight the odds and secure its fundamentals.
Raising Subscription Rate
Netflix plans to increase monthly rate by $1 or $2. It currently receives subscription at $7.99 per month and has a total subscriber base of 48 million.
The modest price hike, although surprising, is a strategic and cautious move to retain its invaluable subscribers. Earlier in 2011, Netflix lost roughly a million of subscribers on account of a jump of $6 in prices, which had a bearing on the company’s shares that plunged severely.
Just to make sure that the loss of subscribers does not happen again, Netflix plans to hike prices for the new members only. The existing users will enjoy the old rate for a good time period.
This January, Netflix raised streaming prices in Ireland by €1. This didn’t have much of an adverse effect as old customers were allowed to continue with the existing fare for coming two years. This could mean that chances of losing customers will be minimal in other countries as well.
But NetFlix is aware that giving privilege to the existing customer and charging the same price for the content might not be enough to keep them going. It would have to offer more content to satisfy these subscribers to ensure that they continue their stay with the company. Increasing content would also help the company to attract more customers and increase subscriber base. It’s but obvious that adding content would call for additional cost. The company can bear it using the increased revenue it would earn from the additional income (from the $1/$2 hike).
Holding the Home Ground
Currently, Netflix has a total domestic subscriber of 35.7 million, an increase of roughly 2 million from the prior quarter and 6 million from the year ago quarter.
The company dominates in the U.S. market with its video streaming services, but it’s currently facing stiff competition from streaming service-providers Amazon (AMZN), Hulu, HBO, and Comcast (CMCSA). Cable companies are airing the best of movies and soaps to keep subscribers glued to the television by offering attractive services. This year all movie and soap-lovers are going to have access to Amazon Prime Instant Video, Hulu Plus and HBO Go, all of which are new services. Comcast, the largest cable company is going to buy another biggie Time Warner Cable (TWC) for a stunning $45.2 billion.
But Netflix looks confident about continuous growth in its subscriber base as it plans to add more original content. The most popular political thriller on Netflix was ‘House of Cards’ and the second season of the program is going to hit the silver screen soon. Other new contents will include series like ‘Derek’, ‘Orange is the New Black’, Hemlock Grove, The Killing, BoJack Horseman, and lot more interesting series.
Bigger Focus on International Front
At the end of first quarter, total International subscribers stood at 12.7 million, up from 10.9 million in prior quarter and 6.1 million in the year ago quarter.
Netflix generates roughly 25% of its streaming revenue from its international operations and is working to improve contribution from the non-U.S. segment. The company sees huge growth prospect in this segment. It has plans to begin serving Germany and France in the latter half of the year..
Netflix is generating losses from its international streaming services only because of high cost, but the good part is that the loss is moderating. Investors could be hoping that the company would soon report positive numbers, but the entire process could get delayed as operating in France and Germany would add to the total cost of the company. On the brighter side, addition of new contents is expected to accelerate the pace of subscriber growth in the non-U.S. regions.
Netflix is concentrating resources to set its basics right and strengthen its fundamental as competition in the market is intensifying. Adding new contents, its strategy to nominally hike prices for new customers, and increase coverage in the non-U.S. market should work in favour of the company.