Four reasons why Netflix Q4 report is exciting

Netflix released their Q4 report earlier this week and since then the stock has rallied. While the obvious reason is that Netflix beat their earlier subscriber forecasts, which will cause further revision upwards of analyst growth estimates, I see several less obvious reasons, which have impact on most OTT video services.

1. Price sensitivity is lower than expected. Netflix made a much controversial price change earlier in 2014, which was assumed would cause increased churn and lower growth. The price increase hasn’t given any effect on growth and while there may have been an initial churn impact, the long term effects are very low. The real observation is that Netflix has proven that an OTT service is slowly and surely as sticky as a pay-TV service, where annual price increases over the past 20 years have had marginal effect on the churn. We’ll likely see regular price increases going forward.

2. The international expansion is starting to make an impact. The international initiative has been a drag on profits for years, and growth has been slow in absolute numbers. Netflix’s brand may have initially been overrated in new territories and expensive campaigns and high churn have followed the international launch. However, Netflix now claims that some markets have a positive contribution and that subscriber growth for the newly launched markets are on track. We can see that total number of subscribers have nearly doubled in 12 months, which is very impressive. They will for sure hit 25M international subs by the end of 2015. If they are anywhere close to their claim of being truly global within 2 years, the international subs may pass the US subs already at the end of 2016.

3. Global content deals. It doesn’t really come as a surprise that Netflix has global plans. The main challenge has always been content rights, and for frequent global travellers like myself, the content challenges are obvious with different offerings in different markets. However, instead of staying within their main markets they are actively pushing the limits on the content licensing market and are succeeding with getting truly global rights to content, which traditionally is unheard of in the conservative TV industry. My assumption is that they will not have exclusive rights to this content (with the obvious exception of Netflix original content) so this will likely pave the way for similar deals for other players with global aspirations.

4. Original content is a huge success. The industry forgets quickly. Three years ago, when the first season of House of Cards was being launched, the industry was hugely skeptical of Netflix’s initiative of producing content. Content production was “an art” and it would be impossible for someone like Netflix to suddenly start expecting to identify and produce hits. In this context, the success cannot be overrated. However, it was always expected that the strategy of original content was to provide a differentiator and to circumvent global content rights, by being able to supply a baseline of content in every territory. What is really surprising is that Netflix in its Q4 report now claims that the original content in 2014 was some of the most efficient content, with higher viewership and customer satisfaction per dollar spent. This may be the most interesting of all, and signals a continued service fragmentation where major services all have original content, which they fiercely protect to drive adoption. Consumers will need to have multiple OTT services to have a complete offering, much like consumers want to have access to multiple networks.

Netflix’s Q4 report is truly impressive. While a revenue growth of about 25% compared to 2013 may not seem that much compared to Internet company growth rates, I firmly believe that Netflix should be compared to the growth of cable companies and TV networks 20-25 years ago, where a substantial value in terms of brand, customer relationships and sticky revenue streams are being built up. It is likely that Netflix can keep or Increase this growth rate for several years.