July 22, 2013, 4:36 PM

Netflix loses steam on memberships

Revenue increased 20% year over year.

Amy Dusto

Associate Editor

Lead Photo

While streaming video and DVD rental service Netflix Inc. has seemingly impressed TV insiders with its original content creations—three of its original series together drew 14 Emmy Award nominations, marking the first time any online show has earned the honor—the investment hasn’t yet spurred huge numbers of subscribers to sign up.

Netflix in the second quarter added just 1.2 million subscribers globally, compared with more than 3 million new subscribers in Q1, it reports today in a letter announcing its earnings to shareholders. Domestically, the company has 29.81 million subscribers, up 24.5% year over year from 23.94 million in Q2 2012, but up just 2.2% quarter over quarter from 29.17 million in Q1.

Internationally, Netflix has 7.75 million subscribers, up 114% year over year from 3.62 million in Q2 2012 but up just 8.5% quarter over quarter from 7.14 million in Q1 2013. The company did not expand into any new territories in Q2, but plans to begin offering streaming videos in the Netherlands in the next quarter, it says.

“Our content mix, streaming and user experiences are all getting better and devices and bandwidth are improving,” write Netflix CEO Reed Hastings and chief financial officer David Wells in the shareholders’ letter. “Countering this, competitors for consumer attention are also all improving, and the risk of U.S. market saturation only grows as we do. Given these competing forces, we are very happy this year to be tracking slightly ahead of prior year in terms of net additions.”

Netflix is No. 9 in the 2013 Internet Retailer Top 500. It competes with Amazon.com Inc., No. 1, which provides streaming videos through Amazon Instant Video and its Prime membership program, as well as the streaming video web site Hulu LLC, No. 92. It also increasingly competes—including for licensing content—with cable and satellite operators that offer TV shows and movies on a pay-to-watch basis and with premium channels like HBO and Showtime.

The release in Q2 of a fourth season of Netflix-produced “Arrested Development,” a show that aired for its first three seasons on Fox, drove a noticeable increase in membership, Hastings and Wells write, without disclosing exactly how many new subscribers joined as a result. “This show already had a strong brand and fan base,” they write. “Other great shows don’t have that noticeable effect in their first season because they are less established.”

For the second quarter, Netflix also reports:

  • Revenue was $1.069 billion, up 20.2% from $889 million in the second quarter of 2012. To date, revenue is $2.093 billion.
  • Net income was $29 million, up 383.3% from $6 million in Q2 2012. To date, net income is $32 million.
  • Domestic subscribers generated $671 million in revenue, up 25.9% from $533 million in Q2 2012. To date, domestic streaming revenue is $1.31 billion.
  • International subscribers generated $166 million in revenue, up 155.4% from $65 million in Q2 2012. To date, international streaming revenue is $308 million.

As streaming video customer growth slows down, Netflix’s domestic DVD customers, who pay an additional $7.99 per month to borrow one DVD at a time by mail and may pay $2 more for Blu-ray discs, continue to drop off. In the second quarter Netflix reports 7.51 million DVD customers, an 18.7% decline from 9.24 million renters in Q2 2012 and down 5.9% from 7.98 million in Q1 2013.

Netflix is paying off over about four years roughly $3 billion in content licensing deals and production, with about 5% of that, or $150 million, going towards original programming, Hastings and Wells write. The company allowed its licensing deal with MTV Networks to expire in Q2, though it added content from networks including Fox Television Studios, The Walt Disney Co. and The Cartoon Network, they say.

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