Analysts: Netflix subscriber growth momentum to continue

Analyst firm Trefis anticipates solid quarterly results from video streaming Netflix when it reports its Q1 2013 earnings on April 22nd.

It expects Netflix to grow its overall subscriber base while reducing international losses. It notes that last quarter Netflix added over 2 million domestic streaming subscribers taking its full year net subscriber additions to around 5.5 million compared to its previous expectation of 5 million. “In addition to this, DVD subscriber losses declined for the fourth consecutive quarter amounting to 380,000. It appears that the subscriber growth has improved significantly over the past few quarters and the momentum continued in Q1 as well. Also, the company didn’t expand to any additional international markets. Therefore, we expect international losses to come down as Netflix solidifies its position in its existing markets,” says the firm.

In terms of Netflix’s streaming business, Trefis suggests the outlook still looks healthy. “Given the recent improvement in Netflix’s streaming subscriber trends, we expect the momentum to have continued into Q1 2013. Netflix’s content advantage in the US and expansion in international markets will continue to drive subscriber growth,” it says.

It suggests that Netflix is still doing well in the Usbecause of its content advantage, growing broadband penetration and increased usage of smartphones, tablets and other connected devices. “Having multiple devices that are connected to the Internet, easy to use, mobile and sleek, perks up. the appetite and desire for streaming video content” it says, noting that Netflix is benefiting from this trend and now constitutes almost 30 per cent of peak Internet traffic in the US.

Trefis suggests that although the competition is increasing, the company has the first mover advantage as it pioneered the subscription streaming service. Netflix has been investing in original content such as House of Cards and Lilyhammer and it also struck a deal last year with Disney (DIS) under which it will get exclusive access to some of the latter’s content once the contract between Starz and Disney expires in 2015. During the first quarter of 2013, Netflix continued to expand its streaming content with deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios.

Netflix expects to add between 500,000 and 1.2 million net subscribers in international markets in Q1 2013. Trefis believes that this may be possible given the traction that the company is getting in these markets.

With Canada and Europe being developed markets, Trefis says that Netflix is positioned well to capture market share in these regions. “The broadband penetration is high and average broadband speeds are good enough to foster growth in streaming services. Overall we believe that Netflix can target a total of 38 million households in its current markets in Europe and can gain more than 12 million subscribers over the long term if it can emulate its success in the U.S. in these markets and can achieve a penetration close to 30 per cent of households. In addition to this, Latin America presents good potential despite a slow start. The growing middle class, an expected improvement in payment systems and the lack of pay-TV penetration can help Netflix. We believe that if the company can achieve a penetration of even 5 per cent of Latin American households over the next 6-7 years, it can gain close to 7-8 million subscribers in this region alone.”

Trefis expects that Netflix’s DVD subscribers will continue to decline every quarter. “The availability of a wide variety of devices for streaming and improving broadband speeds have encouraged the consumer shift to Internet for video entertainment. Also, Netflix is spending heavily on improving its streaming content and over time customers will have less incentive to subscribe to its DVD rental service,” it advises.

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