Netflix Plans Big European Expansion, Isn’t Afraid of Net Neutrality Ruling

/ Jan 22, 2014

Netflix Netflix

Life continues to be good for Netflix.

Netflix released its Q4 2013 earnings report this afternoon, which showed that the company ended 2013 with more than 44 million global subscribers. In the US, Netflix ended Q4 2013 with 33.42 million subscribers, 31.71 million of which were paying members. Internationally, the company added 1.74 million subscribers, rising to 10.93 million total members and 9.72 million paid members.

International is a major area of focus for Netflix in 2014. Previous reports have indicated that Netflix has been eyeing France and Germany as its next two international markets. In its letter to shareholders, the company said: “We plan later this year to embark on a substantial European expansion.” Netflix cites the success it had in 2013 in terms of net overseas customer additions as evidence of a “big international opportunity” for the company.

In fact, Netflix says it expects a 60% increase in year-over-year net additions — to 1.60 million — in Q1 2014. “We’ve seen increases in consumer brand awareness and likelihood to recommend across markets as our content offering builds and marketing messages are honed, factors that help drive y/y growth in net additions,” wrote Netflix CEO Reed Hastings and CFO David Wells in the shareholder letter.

As for that “net neutrality” ruling that some of you have been worried about, Netflix doesn’t appear to be worried. In the same letter, Hastings and Wells write that they don’t see a broadband internet provider discriminating against bandwidth-hoggers like Netflix. “The most likely case,” the execs write, “is that ISPs will avoid this consumer-unfriendly path of discrimination. ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize government action.”

What’s more, Netflix reminds everyone that consumers buy higher internet-speed packages to avoid issues like slow video service. “ISPs appear to recognize this and many of them are working closely with us and other streaming video services to enable the ISPs subscribers to more consistently get the high-quality streaming video consumers desire.”

That said: “Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open internet they are paying their ISP to deliver.”

As for Netflix’s original content business. The company highlighted the new shows and new seasons of existing original shows that will arrive on the service in 2014. Aside from that, Netflix mentioned that “Turbo F.A.S.T,” the animated series produced by DreamWorks Animation, is on track to be “one of the most popular kids series ever on Netflix.” The show, which is based on a DreamWorks feature film, is “especially strong” throughout Latin America. (Go figure, Latin Americans love racing snails.)

netflixglobal

Those weren’t the only highlights from Netflix’s Q4 2013 letter to shareholders. In the interest of speed and clarity, I’ve picked out a few select quotes from the letter and included them below.

On changes to pricing plans:

“Last April we introduced a 4-concurrent stream $11.99 option to begin our evaluation of plan tiering. Since late last year, we have also been testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points. Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone’s taste.

If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices, so there would be no material near-term revenue increase from moving to this potential broader set of options. We are in no rush to implement such new member plans and are still researching the best way to proceed.”

On existing and future competition from other online video providers as well as TV companies:

“Our domestic growth is very strong, much of which should be attributed to the tailwind of Internet video growth in general. Hulu had 3 CEOs in 2013, and yet grew paid subscribers an impressive 65%. We think YouTube, Amazon Instant Video, iTunes video and BBC iPlayer are also growing fast.

In the traditional MVPD sector, there is lots of activity that may affect us on the margin. Verizon is buying the Intel Internet MVPD system and recently bought a CDN (EdgeCast) and streaming software 3 firm (UpLynk). These are big investments, so they clearly have big plans. Sony announced they are launching an Internet MVPD system this year. Finally, depending on the decision of the Supreme Court, Aereo will either have to pay for the broadcast content like MVPDs, or the MVPDs will no longer be obliged to pay. Within the MVPD ecosystem, there are potentially big shake ups. In contrast, we continue licensing and producing more exclusive content for our direct-to-consumer business, and are relatively unaffected by the big bundle questions.”

On integration into TV set-tops:

“During the quarter, we also completed the roll out of the Netflix streaming application into Virgin

Media’s set-top box for UK members and have been quite pleased with the implementation and reception. We followed up with two similar platforms based on the same technology, Denmark’s Waoo! which went live in Q4, and Com Hem in Sweden, which was just recently launched. We anticipate rolling out our first domestic MVPD integrations soon with some of the smaller MVPDs.”

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