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Netflix looking at substantial expansion in Europe

MUMBAI: In a letter to investors to announce its fourth quarter results, OTT service provider Netflix has said that it plans later this year to embark on a substantial European expansion. The success it has achieved this year in international net additions and shrinking contribution losses confirms its belief that there is a big international opportunity for it

In the US growth is very strong, much of which should be attributed to the tailwind of Internet video growth in general. Hulu had three CEOs in 2013, and yet grew paid subscribers an impressive 65%. Netflix said that it thinks that 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 it 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.

Netflix also notes that 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, Netflix notes that it continues licensing and producing more exclusive content for its direct-to-consumer business, and are relatively unaffected by the big bundle questions.

Globally there has been strong member growth and contribution profit/loss improving sequentially in all markets with the exception of the Netherlands as it had its first full quarter of operations and thus loss in Q4.

“There was healthy growth in net additions of 1.74 million in the fourth quarter to end the year at 10.93 million members, slightly above our guidance. As anticipated, net additions were down slightly from the prior year Q4, as the company launched four Nordic markets in the fourth quarter of 2012 versus the relatively smaller Netherlands launch in the third quarter of 2013,” Netflix said.

In the first quarter of 2014, the company is forecasting an almost 60 per cent increase in net additions from the prior year, from 1.02 million to 1.60 million. It has seen increases in consumer brand awareness and likelihood to recommend across markets as its content offering builds and marketing messages are honed, factors that help drive the y/y growth in net additions.

Throughout 2013 substantial progress was made in improving contribution losses – a 30% improvement over the previous fiscal – while also launching a small market. In the first quarter of the new fiscal, it expects to continue this progress and expect a contribution loss of ($42) million, a $15 million sequential improvement.

In the US, meanwhile, net additions in Q4 of 2.33 million were 14% higher than prior year Q4 at 2.05 million. The healthy y/y growth in net additions was likely fueled by service improvements, marketing effectiveness, and sales of Internet connected devices.

The expectation is that this momentum will continue in the first quarter of the new fiscal with net additions of 2.25 million to exceed the prior year by about 11%. Running equal to, or slightly above, prior year net additions is a great outcome because it implies that at 33 million domestic members, the company is still in the middle section of the S curve of consumer adoption, with years of member growth ahead.

The US contribution margin during the quarter increased 420 basis points y/y to 23.4%, as it continued to grow membership and revenue faster than content expense. Over the past 8 quarters since it first broke out the streaming segment, the contribution margin has expanded significantly from the 12.2% posted in Q4’11.

Netflix also spoke about a 4-concurrent stream $11.99 option to begin evaluation of plan tiering that was introduced last year. Since late last year, it has also been testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points. Eventually, the hope is to be able to offer new members a selection of three simple options to fit everyone’s taste.

If pricing changes are made 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. There is, however, no rush to implement such new member plans and the company is still researching the best way to proceed.

Content: On the content front, the company said that it continued to expand its original content offerings in the quarter, launching a second season of ‘Lilyhammer’ starring Steven Van Zandt, the first five episodes of its first original animated series for kids; ‘Turbo F.A.S.T.’, from DreamWorks Animation; original standup comedy specials featuring Aziz Ansari and Russell Peters; and the original documentary ‘The Short Game’.

It has also touted the over 80 major award nominations and wins that its shows have received including Emmy and Golden Globe recognition of ‘House of Cards’, ‘Orange is the New Black’, ‘Arrested Development’ and ‘Hemlock Grove’. ‘House of Cards’ and ‘Orange is the New Black’ were also included in the American Film Institute’s list of the best 10 TV series of the year. The company has also been nominated for an Oscar through the documentary ‘The Square’.

Timed for family viewing over the holidays, ‘Turbo F.A.S.T’ has been very popular with kids around the world, performing especially strong throughout Latin America. As the company had hoped, the global theatrical and home video release of the DreamWorks Animation film based on the same characters helped position the series for success. Though just launched, Turbo F.A.S.T. is on track to become one of the most popular kids series ever on Netflix.

The second season of ‘Lilyhammer’ was its first ever for a Netflix original series. The show is finding a broader audience, as Netflix has introduced new English speaking characters and more global storylines. The third season has recently begun production in Norway and the creators again plan to add characters that will further broaden the appeal of this already very international show.

For this year the company anticipates building on momentum with new seasons of ‘House of Cards’, ‘Derek’, ‘Hemlock Grove’, ‘Orange is the New Black’, ‘Lilyhammer’ and a final season of ‘The Killing’; as well as additional episodes of ‘Turbo F.A.S.T.’ and premiere launches of its first original animated series for adults, ‘BoJack Horseman’ and a series based on the adventures of Marco Polo from The Weinstein Co., and additional new kids series from DreamWorks Animation.

On the documentary front, in addition to ‘The Square’, the company will globally release ‘MITT’, the gala premiere opening film at the Sundance Film Festival this year.

Next year the company anticipates the release of the first season of ‘Sense8’ from the Wachowski siblings and J. Michael Straczynski, the as-yet unnamed project from the creators of ‘Damages’, and ‘Daredevil’, the first series from its recently announced deal with Marvel Television.

Beyond its own series, Netflix will exclusively premiere new episodes of ‘Better Call Saul’, the hotly anticipated spin-off of ‘Breaking Bad’ in the UK and Ireland, throughout Latin America, the Nordics and the Netherlands. Those episodes will premiere in North America on Netflix following their run on AMC. As part of that deal, the company expanded and extended its exclusive deal for the entire ‘Breaking Bad’ series to all territories.

Product: On the product front, the company rolled out its new user-interface for TV devices, a material step forward not only objectively in terms of engagement metrics, but in terms of press and public attention. This user interface is coupled with the new technology platform for TV devices, which has a smaller footprint and is higher performing, allowing Netflix to reach lower-powered devices and enabling future growth into new areas.

During the quarter, the company 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. The company 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,” Netflix said.