Netflix ‘Really Happy’ With Q2 Net Adds, Even if Investors Aren’t

In the session, reporter Julia Boorstin of CNBC and analyst Rich Greenfield of BTIG peppered Hastings and other Netflix executives with questions they said they had culled from the Internet. Netflix resorted to the novel video Q-and-A, streamed live Monday after U.S. markets had closed, because “we have always admired the fireside chat format at investor conferences as being the most dynamic and interesting, and this is our attempt to bring that value to the broad online public,” Hastings said. Time will tell if Netflix tries it again for quarterly earnings, he said.

Netflix reached 29.81 million total U.S. subscribers in the quarter, short of the 30.05 million it had indicated at the top end of its forecast range of 29.4 million to 30.05 million in guidance it issued three months ago. Internationally, Netflix reached 7.75 million subscribers in Q2, lower than the 7.9 million at the top end of its forecast range of 7.3 million to 7.9 million. “When we do our forecasting in the beginning of the quarter, when we know all of the factors going into that, we try to set the range so that we come in in the middle of the range as we did,” Hastings said. “So we are really happy with the progress in the business. We are happy that net adds were higher than a year ago in our domestic business, and much higher on the international business."

Domestically, net subscriber additions were 630,000 in Q2, compared with 530,000 in the same quarter a year earlier, Netflix said. Some analysts said they had expected Q2 net adds in the U.S. to approach 900,000. Internationally, net adds were 610,000 vs. 560,000 a year earlier, it said. In the company’s letter to shareholders, also released Monday, Hastings said “seasonality” factors as the company has grown customarily have caused Q2 net adds to be lower than those of a year earlier, but that the launch of Arrested Development made this Q2 “an exception.” That’s because the show “already had a strong brand and fan base, generating a small but noticeable bump in membership when we released it,” he said. “Other great shows don’t have that noticeable effect in their first season because they are less established."

In the Q-and-A, Hastings declined to say how many new subscribers signed on as a result of Arrested Development. Netflix is just “in the very early innings” of promoting original content, he said. “What we did see was a little rise in gross additions which translated to net additions, more than the weekly pattern would have suggested.” The bump “was tremendously significant in the short term,” he said. Still, most subscribers “retain with us for a variety of content, not just a single show,” he said.

Netflix steadfastly refuses to release viewership numbers on its original programming because disclosing those statistics would make for an “apples and oranges comparison to what happens on a network,” Hastings said. “We view the viewing over a very long period of time.” However, he advised outsiders to construe “our renewal of a show to a second season as a very positive sign.” That’s because “if we're renewing shows that people aren’t watching in big numbers, then we're creating a huge opportunity cost in our content spend,” he said. “In other words, we won’t have money to spend on things that people watch. So these shows are performing really well for us."

Hastings stands by his projections that Netflix one day will have the potential to reach 60 million to 90 million total subscribers, he said in the Q-and-A. “By the time we get to 40 and 50, we get the content better and the service better,” he said. “And so it’s not 60 or 90 for the current service, it’s 60 or 90 for the future service that’s much improved.” He envisions the Netflix of the future encompassing “maybe a lot more originals and just incredible streaming,” he said.

However, market saturation is a strong concern, and “we never know when and how saturation will hit,” Hastings said. On the one hand, “our content is getting better, our service is getting better,” he said. On the other hand, “the longer time goes by, the better [our] competitors are,” he said. “So those are the opposing forces, and given those forces, we're extremely excited to have our net adds be at the same level as last year because that implies that there is no near-term saturation."

Unlike HBO, Netflix doesn’t own its own content, nor does it profit from licensing that content to other outlets, Hastings said. However, HBO also “has a lot of licensed content,” and it’s “only the originals and only some of their originals that they own,” so it’s valid comparing HBO with Netflix, as Hastings often does, he said. Ultimately, Netflix, like HBO, “absolutely” plans to move more and more into “full ownership” of its content, Hastings said: “It’s natural for us to grow into that over the next couple of years.” He cautioned that “there are so many gradations between what full ownership is in every territory.” But, he said, “think of it as over time, we'll do more and more of that and the content will be more and more exclusive to Netflix.” When it comes to creating original content, Netflix has an important competitive advantage in that “we've got this online performance-matching, where the content is selectively promoted to each subscriber appropriately, and that helps tremendously,” Hastings said.

Netflix doesn’t “really know” yet what the impact will be from the fact that streaming rivals Amazon and Hulu have significantly increased their spending on original programming, Hastings said. “We always take them very seriously,” he said. “They're very successful. But if you look at Showtime and HBO, when Showtime does great work, it doesn’t take away from HBO.” Similarly, when Amazon and Hulu “do great originals, it will grow the whole Internet TV market,” he said. Then, what will control “our destiny” at Netflix will be “great programming, or “a great user interface,” or “incredible streaming,” he said. “And so we really just focus on maximizing that opportunity by making our service the best it can be."

Within several months, Netflix plans to expand into “original standup comedy specials and documentaries that will premiere on Netflix to be exclusive to Netflix,” said Chief Content Officer Ted Sarandos. There’s “no reason” Netflix couldn’t also expand into other forms of original content, such as creating its own movies, TV talk shows, sports or 24-hour news channels, he said. “If you look at HBO and Showtime, they also do quite a bit of sports programming and live sports,” Hastings said. “So they're basically in the membership happiness business. Now, we don’t anticipate getting that far from our core brand, but it’s a very flexible relationship, where we can have lots of types of content over the next five or 10 years if it makes our subscribers happy. We're fundamentally in the membership happiness business as opposed to being in the TV show business.” Short term, Netflix wants to concentrate on “learning this craft bit by bit and having our current shows be wildly successful,” he said.

Asked if he sees a big shift coming toward Netflix wireless streaming on tablets and other mobile devices, Hastings said tablet users already account for “a growing proportion of our viewing and that helps the ecosystem.” But Netflix as a policy doesn’t disclose what proportions of its subscribers access the service on their tablets, Hastings said when asked if that proportion is 5 percent or more. All in all, “better and cheaper connectivity, more competition for broadband -- that’s all very positive,” he said. “But these are gradual multi-year effects. Five or 10 years from now, consumers will have incredible devices, incredible broadband at low prices and that’s very favorable in the long-term. But I don’t think it’s a short-term catalyst.”

Other disclosures: Netflix has no plans to shut down its legacy mail-order DVD business, Hastings said. That’s because there are more than 7 million Netflix subscribers “who love the service,” he said. “It’s got incredible selection -- every movie and TV show ever made. So it’s got a great part of the value equation for over 7 million members and that will go on for a very long time.”