In the first quarter of 2014, Netflix added 2.25 million new members in the US, reaching a total of 35.7 million American members.
Worldwide, membership topped 48 million. The company reported $1.27 billion in quarterly streaming revenue, and profits of $53 million ($0.86 a share) for Q1 2014, compared to $2.7 million ($0.05 a share) in Q1 2013.
In January 2014, when Netflix announced it had reached 44 million subscribers at the end of 2013, it predicted 48 million by the end of Q1 2014.
Netflix provides streaming videos online as well as DVD by post. US subscribers are charged $7.99 per month, which allows users to access from two screens simultaneously.
New members will have to pay more
New members may have to pay “one or two dollars” more monthly for its popular video streaming service. The price increase is planned to start late in the second quarter. In after-hours trading shares in the company rose more than 6%.
Current customers will not be affected by the price increase, the company emphasized. It added that the FIFA World Cup in June 2014 may have a negative effect on business for a few weeks.
In an interview with Bloomberg Businessweek, Daniel Ernst, an analyst at Hudson Square Research in New York, said “The earnings leverage of even just a dollar is pretty substantial. For what Netflix provides, it’s an incredible value for consumers.” Ernst recommends buying Netflix shares.
The Los Angeles Times quoted Michael Pacther of Wedbush securities who wrote in a note to clients “Price increases over time should allow Netflix to add content and keep its subscriber base satisfied. Netflix management has done a masterful job of driving subscriber growth and managing content spending in recent years, resulting in sustained subscriber gains and improving profitability.”
Patcher added, however, that even a slight increase in prices may reduce subscriber growth numbers.
Original programming key to Netflix success
Netflix co-founder and CEO, Reed Hastings, says the company’s success is due to its original programming, particularly its House of Cards drama starring Kevin Spacey.
Higher subscription rates will help Netflix expand its range of content and “deliver an even better streaming experience,” Hastings added.
Despite good first quarter results, Hasting says the company still has a long way to go. In a letter to shareholders, he wrote “We are approaching 50 million global members, but that is far short of HBO’s 130 million. We are eager to close the gap.”
The company predicts about 1.46 million new subscribers will sign up this quarter, 0.52 million of them within the US.
Dearer licenses for movies and TV programs
Hastings explained that the cost of licensing movies and TV programs from Hollywood is increasing significantly. At the end of 2013, Netflix had $7.25 billion in licensing commitments over the next five years.
Hastings said:
“‘House of Cards,’ for which Season 2 debuted in February, attracted a huge audience that would make any cable or broadcast network happy. The on-demand nature of Netflix means that as we promote Season 2, we can still see significant new enjoyment of Season 1.”
Fox Business quoted Andy Hargreaves of Pacific Crest Securities, who wrote regarding Netflix’s Q1 2014 results and its plans to raise prices:
“This dramatically increases our revenue and profit estimates from current markets over the next three years.”
“Further, it seems highly likely that Netflix will accelerate international expansion beginning in the second half of 2014, which should expand the company’s TAM (total addressable market) and allow it to drive meaningful upside to long-term profit expectations.”
Netflix idea born from an overdue video rental
Netflix was set up by March Randolph and Reed Hastings in 1997 in Scotts Valley, California. Its headquarters are in Los Gatos, California.
Hastings got the idea of setting up Netflix one day after he had to pay a hefty penalty for bringing back the video of Apollo 13 well past its due data.
Netflix started its digital distribution service in 1999. Ten years later it had more than 100,000 titles on DVD and 10 million subscribers.
Netflix was offered to Blockbuster in 2000 for $50 million, but the DVD rental company said it was not interested.