Netflix back in the cash with 36% revenue growth

Last time Netflix reported its quarterly financials it disappointed investors. Three months later its back to its blistering best with revenues of $3.9 billion.

The year-on-year growth of 36% represents a strong quarter for the streaming giant, capturing 6.9 million additional subscriptions, the vast majority of which came from international markets. Net income stood at a healthy $403 million, compared to $130 million in the same period of 2017.

“Overall, this was a strong quarter for the company,” said independent analyst Paolo Pescatore. “Normal service has been restored.

“This was a key quarter for the company following the challenges of the prior one which was a one off and largely down to seasonality. More importantly strong growth in its overseas market is encouraging.”

Back in Amsterdam during this year’s IBC, the international markets were highlighted as critical to Netflix’s continued growth. This is not to say the US market has hit a glass ceiling, but with the current penetration (58 million subscribers) and intense competition for attention, this is not a market Netflix can use to continue the momentum investors have become accustomed to. For Maria Ferreras, VP of EMEA Business Development at Netflix, new markets, new content and new partnerships are key.

On the content side of things, the localisation strategy will have to be accelerated. Creating local content, using local production companies and journalists, is key for engagement, though with new rules in the European Union, the focus will have to be razor-sharp. The new rules will eventually require subscription streaming services to devote a minimum of 30% of their catalogue to European works, while some member states will force Netflix to reinvest the revenues realized in those markets back into local production. This is generally the Netflix strategy, though it might have to accelerate timelines.

In terms of localisation, this is not just on the content side; partnerships with regionalised pay TV providers, ISPs and mobile operators will continue to play a more prominent role. Such partnerships offer a faster route to the customer than organic marketing can, and there are already dozens of examples around the world. Examples from this quarter include the first mobile bundle in Japan with KDDI and an expanded partnership with Verizon to pre-install the Netflix app on Android phones.

“All of its rivals are now making huge bets on video and it cannot afford to be left behind,” said Pescatore. “It now needs to rely more than ever on its extensive cable and telco relationships.”

For the next quarter, Netflix is again expecting good things. Revenues are expected to grow 26% to roughly $4.2 billion, with the team targeting an additional 9.4 million subscriptions. The international markets will be the primary generator of this growth, expected to add an additional 7.6 million subscriptions, though only growing revenues by 10%. With offers and partnerships playing a strong role in creating this momentum, lower revenue growth is to be expected.

Netflix is the premier streaming service worldwide and it doesn’t look like it is going to lose that position anytime soon. Amazon’s own content business is making progress as well, while Disney is bound to offer some resistance, but Netflix is still dominant. New partnerships in the international markets and an increased focus on regionalised content will only add to the momentum. 26% growth over the next three months is a big ask, but the signs are all positive.

You can see why there’s so much interest in Sky

Sky has released its financial results for the last twelve months, and you can see why a bidding battle enraged over the UK’s biggest premium content provider.

Total revenues for the year stood at £13.6 billion, while operating profit was £1.034 billion, year-on-year increases of 5% and 7% respectively. Customers are clearly happy with the content platform, and the promise of more original programming over the next twelve months will only make this proposition more attractive.

“It’s been an exceptional year,” said CEO Jeremy Darroch. “We’ve delivered another set of strong results with like-for-like revenues up 5%, Established Business EBITDA up 11% and EPS up 10%. Over half a million new customers joined Sky this year and we now have 63 million products in customer’s homes as they continue to choose Sky over other providers. As a consequence, we have extended our leadership position as Europe’s largest direct-to-consumer media and entertainment business.”

In its largest market, the UK, revenues increased 4% to just over £8.9 billion, adding 270,000 new customers across the year. Churn on its TV product was down to the lowest point in a decade, while advertising revenues increased 6% despite claiming the market overall is relatively stagnant. Content is still by far and away the cash cow for Sky, though with the mobile unit adding another 95,000 customers in the final quarter, taking the total to more than 500,000, while fibre penetration of the broadband business is now up to 38%, the convergence strategy is clearly starting to take hold.

While this strategy might have been championed in the UK, it won’t be too long before it starts making an impact elsewhere. A partnership with Open Fiber in Italy will grant access Fibre-to-the-Home (FTTH) network and allowing the launch of a triple-play service from Summer 2019, while there are also plans to kick-off a GB fibre offensive in Ireland.

That said, Sky might be looking to diversify into new streams, but it is putting into practise a lesson many telcos could learn with learning; its nailing the traditional business first. Many telcos might have forgotten about connectivity in the search for profits elsewhere, but Sky is continuing to bolster its content platform. Keep the customers happy with your core service and build everything else as a bonus.

“The deals forged over the past few months, including a cross-channel sharing agreement with BT, Netflix and other leading online services indicate that Sky is positioning itself as an aggregator of content and services,” said tech, media and content analyst, Paolo Pescatore. “Sky is the undisputed leader in bundling services in the UK and we now expect it to take the same approach in other markets. Content remains at the heart of the company.”

The original content it plans on producing over the next couple of months is just one cog in the machine. New partnerships with Netflix, Mediaset, BT and Spotify start to evolve the Sky proposition into the aggregator model, while sport is back as the big ticket item with top-league football throughout the continent and the rights to the Ryder Cup at the end of the year.

Sky is evolving its business model to fit the demands of the consumer in the digital era, but it has not gotten distracted with the convergence hype, despite gains in the connectivity game. Sky has not forgotten about its core mission to its customers. A few other businesses could learn a thing or two here.