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 last week. 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 rapid growth of global, online TV services, led by Los Gatos, Calif.-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 Officer Reed Hastings outlined this cycle on a call with analysts after reporting that 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.
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.
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.
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.
Last week, Netflix signed a deal with Jerry Seinfeld, and it 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 U.S. Such 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, FX CEO John Landgraf has said.
The Esquire Network, owned by Comcast and Hearst Corp., fell prey to those economics, one of many pay-TV channels potentially on the chopping block as consumers cut the cable cord. Dropped weeks ago by AT&T, the male-focused channel lost 15 million households and will become an online-only network later this year.
Netflix argues that this is the precise time to make more shows. It says alluring programs are vital to persuading more people to defect from existing TV networks and services. The company predicts that it will sign 3.7 million new international customers in the quarter, compared with analysts' projections of 3.5 million. In the U.S., 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."
SundayMonday Business on 01/23/2017