After announcing it had streamed a billion hours in June, Netflix unsurprisingly turned in solid quarterly earnings, showing a profit of 6 cents per share on $889 million in revenue. Domestic digital subscribers grew modestly from 23.41 million to 23.9 million. Digital video streaming is also a hit outside the U.S., where subscribers went from 3.07 million to 3.7 million, for a continued loss of $89 million. Meanwhile, the company's profitable but shrinking DVD business continued to dwindle, dropping from just over 10 million to 9.2 million. The profits won't last forever. Netflix forecasts a global loss in the fourth quarter of this year as it enters a yet-unnamed foreign market.
Even though Wall Street expected slightly better numbers, this is good news for Netflix. "Our growing US streaming contribution profit stream shows what is possible," writes CEO Reed Hastings and CFO David Wells. "We can’t wait to serve a global audience with an amazing Internet video experience."
It's been a year since things began to go wrong for Netflix. Last July, the company announced it would offer separate DVD rental and streaming video plans, a boon to new customers who only wanted one or the other, but a hefty price hike for loyal customers who wanted to keep their bundled plans. In September, just as the price changes kicked in, Netflix lost the rights to stream popular premium movies from Starz and net domestic customers for the first time in its history. The dual backlash from customers and shareholders prompted a bizarre public flirtation with splitting the company in two, with Netflix handling streaming video and spinoff Qwikster managing the legacy business in optical discs. The Qwikster plan was mercifully scrapped in October.
In four months, Netflix and CEO Reed Hastings went from streaming video's inevitable juggernaut and its visionary leader to open objects of ridicule. It's been an uphill battle ever since for Netflix to regain everyone's confidence, from Wall Street to Main Street to Hollywood, all of whom began to wonder if they should take their business somewhere else.
Can Netflix reverse its funk and keep its lead? In the last year, Netflix has found it harder and harder to get good movies and television shows cheap. It introduced its own HBO-style original content, expanded overseas, and continually updated its own technology, even as it faced new domestic competition from Amazon, Redbox, Hulu, YouTube, and the major cable companies, all serving up their own streaming video offerings to capture viewers' money and attention.
The cable and telecom companies even seemed to be stacking the deck, throttling Netflix but not their own streaming video in a possible violation of net neutrality. With so many services competing for quality programming and driving up the wholesale cost of digital video, how could Netflix reverse its funk and keep its lead, without raising prices on customers again?
Netflix actually lost money last quarter, even though it showed good gains in global customers and domestic streaming profits. By bouncing back, Netflix quiets some (but not all) of its doubters on Wall Street, and has more money to put towards growing its catalog and expanding to countries where Amazon and Hulu can't follow. Really, all Netflix can do is continue to try to put more video on more devices in more countries with a better, more reliable technology stack than anybody else.
In one year, Netflix has mostly completed its transformation into a profitable and growing global streaming video company. Its challenge now is to continue to grow when it's competing with companies like Amazon or Comcast who don't care if they make a profit on streaming video, because they'll make their money back somewhere else. Netflix's nightmare year is over; now comes the hard part.