Los Angeles - The future of television just got a little clearer.
An hour after Comcast said its Esquire cable network will shut down, a
sign of flagging interest in traditional pay TV, Netflix reported its biggest
quarter ever, beating analysts’ estimates on new subscribers and validating its
vision of a world where everyone watches TV online and on-demand.
Netflix signed up a record 7.05 million customers in the fourth quarter of
2016 to cap the biggest year in company history, according to a statement Wednesday.
The world’s largest paid video service added 19 million customers worldwide in
2016 after expanding to more than 190 countries, reaching everywhere but China,
North Korea, Syria and Crimea. The shares soared as much as 9.6 percent to $146
in extended trading, an all-time high.
The rapid growth of global, online TV services, led by Los Gatos,
California-based Netflix, is challenging many of the world’s largest media and
telecommunications companies to adapt to a new world in which more people spurn
the traditional $85-a-month cable subscription and spend less time watching
live TV.
“The amount of destruction that’s going to happen within
traditional TV creates a virtuous cycle for Netflix,” said Tony Wible, an
analyst with Drexel Hamilton who recommends buying the
stock. Netflix chief executive Reed Hastings outlined this
cycle on a call with analysts after reporting fourth-quarter earnings rose to
15 cents a share from 10 cents a year ago, beating Wall Street forecasts. Sales
grew 36 percent to $2.48 billion.
The more people use Netflix, the more money the company spends on shows,
leading to favorable reviews and more users, he said. And after 20 years of
operating near break-even, and spending every spare cent developing programming
or marketing the service to new subscribers, Netflix finally expects to deliver
material profit.
Profit forecast
The company forecasts earnings of $165 million, or 37 cents a share, for
the first quarter. That’s almost double analysts’ estimates of 19 cents and
would be the company’s biggest profit ever. International markets, long a
source of losses, will begin contributing to earnings, too, the company said.
Read also: Netflix is taking over Hollywood
The popularity of the period drama “The Crown”, about a young Queen
Elizabeth II, along with new seasons of “Gilmore Girls” and “Black Mirror”
helped Netflix lift its total online customer base to almost 94 million.
“Gilmore Girls,” a reboot of a show that aired on TV from 2000 to 2007, was one
of the 10 most popular shows in every market, Netflix said.
The company also
released its first original Brazilian series, “3%.” How many people watch
any given Netflix show remains a mystery since the company doesn’t offer
concrete data. However, it does call out particular successes, like a new
season of the sci-fi show “Black Mirror.” Netflix programs accounted for five
of the 10 most-searched TV shows of 2016, based on Google trend data, the
company said.
42 titles
Netflix will release 42 titles through the end of the quarter, spanning
dramas, comedies, documentaries, movies, kids’ shows and stand-up comedy,
officials said on the call. This week, Netflix signed a deal with Jerry
Seinfeld, and plans to develop, produce and own more of its shows rather than
depend on other TV studios.
Netflix is also increasing the output of
international productions that have been vital to the service’s growth outside
the US Such local productions “create a lot of great excitement for
Netflix in the market,” Ted Sarandos, the company’s chief content officer, said
on the call. “It’s a really elevated form of TV relative to what’s available.”
Netflix’s spending has prompted peers to warn that too many shows are
being made and that the company’s spending is unsustainable. The TV industry
produced an all-time high 450-plus scripted shows in 2016, according to data
from cable network FX. This trend can’t go on because most shows are
unprofitable and many networks are losing viewers, John Landgraf, FX’s chief
executive officer, has said.
The Esquire Network, owned by Comcast and Hearst Corp., fell prey to those
economics Wednesday, one of many pay-TV channels potentially on the chopping
block as consumers cut the cable cord. Dropped weeks ago by AT&T Inc., the
male-focused channel lost 15 million households and will become an online only
network later this year.
Time to spend
Netflix argues this is the precise time to make more shows. Alluring
programs are vital to convincing more people to defect from existing TV
networks and services. The company predicts it will sign 3.7 million new
international customers in the quarter, compared with analysts’ projections of
3.5 million. In the US, the company expects to add 1.5 million new domestic
streaming customers, compared with estimates of 1.72 million.
Netflix will spend $6 billion on programming in 2017, part of its
longer-term budget of $14.5 billion. The company forecasts negative free cash
flow of $2 billion in 2017, wider than the year just ended, and said it will
continue to borrow as needed.
Skeptics fretting about costs are missing the bigger picture, Wible said.
“The losses Netflix generates are its biggest competitive advantage,”
analyst Wible said. “They make it incredibly difficult to compete.”
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