In a note to shareholders Monday that accompanied its first-quarter earnings report, Netflix CEO Reed Hastings and CFO David Wells wrote that the House of Cards decision “was driven by a desire to test a new licensing model using a small portion of our content budget.”
“We want to confirm our theory that because we are click-and-watch rather than appointment viewing, we can efficiently build a big audience for a well-produced serialized show,” they say in the letter. “We’ll license two or three similar, but smaller, deals so we can gain confidence that whatever results we achieve are repeatable.”
House of Cards, produced by Media Rights Capital, will star Kevin Spacey and some episodes are expected to be directed by David Fincher. Instead of airing on TV, Netflix has commissioned 26 episodes and will stream them to its customers beginning in 2012 at an estimated cost of $100 million.
Netflix added 3.3 million domestic subscribers during the quarter, giving it 22.8 million in the U.S., enough to tie it with Comcast as the biggest media-subscription business in the country. Sirius XM Radio boasts 20.2 million and Microsoft’s Xbox Live has 30 million, though the company hasn’t said how many are free and how many are paid.
Netflix posted net income of $60 million in the quarter, up 88 percent from the same frame a year ago, on revenue that grew 46 percent to $719 million.
The results topped the expectations of most analysts, but the company gave a conservative outlook that spooked some and the stock, which was down fractionally to $251.67 in regular trading, fell more that 5 percent in the after-hours session as some investors took profits — which could be considerable given that Netflix shares are 450 percent more valuable Monday than they were two years ago.
Streaming has become Netflix’s primary business, and the company said in its letter Monday that it expects “spending on streaming content to increase substantially.”
Analysts expect Netflix to spend more than $1 billion in 2011 to acquire content for streaming.
In the quarter, just as many new subscribers signed on for the streaming-only option as did the hybrid option that also offers the traditional DVD-by-mail service, Netflix said.
“We believe that DVD will be a fading differentiator given the explosive growth of streaming,” Hastings and Wells said in their letter to shareholders.
They predicted that, for the first time, Netflix will mail out fewer DVDs in the next quarter than it did in the same quarter a year ago, because customers prefer online and on-demand.
The pair also sent a message to CBS and Time Warner executives who haven’t licensed their Showtime and HBO content, respectively, to Netflix for streaming. The Netflix execs made the point that watching old episodes of current shows creates new in-season fans.
“We hope over time that HBO and Showtime will let us prove this proposition for them,” they said. “Content owners that license to Netflix make more money – now and in the future – than content owners who don’t license to Netflix.”
Netflix is just beginning its international expansion, and it said Monday that it has about 800,000 subscribers in Canada, the only Netflix country outside the U.S. thus far.
