Netflix and Starz

Netflix added 1.7 million subscribers in the US  to end the quarter with 23.4m US subscribers in Q1 2012 that ended on March 31, 2012.   They also added an additional 1.2 million subscribers outside the US for a total of 2.9 million subscribers addition in Q1.  This is a very good number considering 2 major negative events in the past 6 months that the company endured.

The first is the price increase and the split of their streaming and DVD business that triggered massive exodus of subscribers back in September 2011.  In addition, the Qwikster announcement which they quickly reverted also added to the negative sentiment about the company and the brand.

The other significant event is the removal of Starz/Disney contents from their streaming lineup due to contract expiration which happened in late Feb 2012.  These are samples of movies that Netflix lost (here is the link for 50 others that are notable) :

  • Tangled
  • Toy Story 3
  • Scarface
  • Tron:Legacy
  • Secretariat

Although Netflix claimed in their shareholder letters in Q3 2011 that Starz contents only constitutes 6% of the total subscribers viewing hours, I still felt that these are blockbuster contents that could generate positive halo effect on their brand and streaming service.  These contents were prominently displayed in their website’s landing page for non-subscribers and served as window dressing to attract people to come to the store and try the service.  It would have been more difficult to add new subscribers without these contents.

The quarterly result indicates 2 things to me.  The first is that Starz contents do not matter as much.  People subscribe to Netflix for mainly long tail contents.  Second, the work that Netflix has done on the distribution channel in 2011 to enable tablets, smart phones, and connected TV/blueray players are paying off and offsetting the Starz negatives.  With the recovery of the brand and competition that are still trying to catch up, I anticipate Netflix to continue to add subscribers in 2012 and ride the mobile internet video adoption wave (in addition to fixed line).