Netflix’s Streaming Service Did Not Drive Increased Earnings
After Netflix gave earnings last week, various news sites pointed to Netflix's streaming service as the reason why Netflix earnings beat estimates. Most seem to attribute this to the comment Netflix's CEO said on the earnings call, which was, "It's very clear that streaming is energizing our growth."
What I didn't see anyone asking is what "growth" Netflix was talking about? Since the CEO didn't elaborate on exactly what he meant, too may people assumed he meant revenue or subscriber growth, which is not the case. I was going to just leave it alone and not even blog about that point, but a week later folks are still talking about this and also being way too vague about the Netflix content offering as well. Today I read an article about the success Netflix is having with their "digital downloads", which sounds great, except for the fact that Netflix isn't in the "digital download" business. Netflix doesn't download anything since they stream all of their movies to multiple devices.
This may seem like I am splitting hairs over terminology, but I'm not. It's important to break out the market from digital download services like iTunes and others versus the streaming media service that Netflix offers where the user never owns any actual piece of content. We've got to talk about this technology right and we have to make sure expectations are set properly.
Getting back to my main point, at no time on the earnings call did Netflix say that the streaming service allowed them to beat or increase their earnings. In fact when I asked them for more details about this after the call, Netflix said the exact opposite, saying, "Reed Hastings was referring to growth in the generic sense, not tying specific subscriber growth, revenue or earnings to the success of streaming. We haven't said that instant watching has driven a specific number of new subscribers."
Netflix was very forthcoming with this and made their point very clear in their follow up response. Did anything think of actually asking Netflix what they meant on their earnings call before they ran with stories proclaiming streaming as the reason they beat estimates? Sure, one can speculate that down the road their streaming service could generate a whole new business model, or earn them revenue in some other way, but right now no one can say they make more money simply because they have a streaming service.
The fact that they are seeing an increased demand for their watch now service might indicate that over time, Netflix can increase their P&L if it is cheaper for them to deliver a movie via streaming as opposed to having to pay to ship a DVD to and from the customer. Streaming could be a cost savings but that will only happen with serious economics of scale and with the DVD business growth slowing, which Netflix does not see happening until 2012. We don't know what it costs Netflix to stream a single movie and the watch now service could actually cost Netflix more money if the convenience of being able to see movies at any time allows a member to consume more movies instantly then they would ever get if they were only coming in the mail. These are all speculative questions since Netflix has yet to break out numbers for the digital portion of their business but right now, Netflix's streaming service is not increasing their revenues.