By Dow Jones Business News,
July 21, 2014, 04:55:00 PM EDT
Netflix Inc. said its second-quarter earnings more than doubled as it added 1.7 million subscribers world-wide but it
cautioned that a more aggressive international expansion would hurt profits in the third quarter.
Net income rose to $71 million, or $1.15 a share, from $29 million, or 49 cents a share, a year earlier. But the
streaming video and DVD-by-mail provider forecast that third-quarter earnings would be affected by higher expenses in
Europe and predicted the "contribution loss' from international streaming would jump to $42 million from $15 million in
the second quarter.
In a letter to shareholders, Netflix said its "broad success' abroad "has convinced us to further invest aggressively
in global expansion."
On Monday, it said its previously announced plans to expand into six new European countries, including Germany, France
and Austria, are set to launch in September. The company's international markets already include parts of Europe, such
as Finland, as well as Latin America. Launching in new markets is expensive, as Netflix has to spend on marketing to
build up its brand against established competitors such as Amazon.com Inc. in Germany. Netflix also has to invest in TV
show and movie rights for the international markets.
Even before the latest expansion moves, Netflix's international subscriber growth accelerated sharply in the second
quarter. Net additions rose to 1.12 million from 610,000 a year earlier. In contrast, growth in the U.S. slowed
slightly, to 570,000 from 630,000 a year earlier.
Netflix has grown to become the biggest stand-alone subscription programming service in the U.S., with 35.09 million
paid members. It has 48 million paid subscribers globally.
The company recently implemented a price increase, its first since 2011. New U.S. customers will pay $1 more a month,
at $8.99, with existing customers charged the higher price after two years. New overseas customers saw a similar
The streaming service uses large amounts of Internet bandwidth and, as a result, Netflix has continued to butt heads
with broadband providers such as Verizon Communications Inc. and Comcast, despite reaching deals with both earlier this
year to pay to interconnect its servers directly with their networks.
Netflix has argued it shouldn't have to pay for "interconnection" deals, arguing such practices violate "strong" net
neutrality--the concept that all Internet traffic should be handled equally. The providers, in turn, have shot back that
Netflix was enabling a deteriorating streaming experience for their shared subscribers by routing its traffic
inefficiently to pressure the providers.
In an interview Monday, Netflix Chief Executive Reed Hastings said he met at Sun Valley with Verizon CEO Lowell McAdam
and they agreed to have both their teams "working harder to have faster Netflix on Verizon." Mr. Hastings said there
should be "rapid improvement over the coming months'--earlier than the end-of-year time frame that Verizon has
Mr. Hastings says he isn't sure why the upgrades had gotten delayed, but both he and Mr. McAdam had agreed that "it
In the U.S., Netflix is facing a rapidly consolidating media landscape, with pay-TV and broadband providers Comcast
Corp. and Time Warner Cable agreeing to merge, while expectations of a content merger are rising. Last week Time Warner
Inc. confirmed it had rejected a nearly $80 billion offer from 21st Century Fox Inc.
Netflix has urged the federal government to block the Comcast-Time Warner Cable deal, although on an earnings
conference call Monday Mr. Hastings said the "most practical thing" would be for the Federal Communications Commission
to make "no-fee" interconnection a merger condition policy as it weighs the proposed merger.
Netflix also showed less concern about a Fox-Time Warner merger. On the conference call, Netflix Chief Content Officer
Ted Sarandos said both Fox and Time Warner are "pretty powerful companies today" and "I don't know how that changes much
in terms of them coming together."
Mr. Hastings said that the more Netflix works directly with producers to create original shows, "the less vulnerable
we are to aggregation in the big content suppliers."
In its shareholder letter, Netflix said it now has original series in production around the world to reflect the "
increasingly global nature of the Netflix service," including a historical adventure "Marco Polo" shooting in Kazakhstan
To boost subscriber growth, Netflix said it would introduce physical gift cards in select stores in the U.S., Canada,
Mexico, and Germany starting later this year. The company said it expects the gift cards to make it an "easier
alternative for consumers to join Netflix" in newer markets, and to extend its "brand presence" in mature markets.
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