Netflix reported solid Q4 2014 results yesterday, with subscriber growth accelerating internationally, while slowing in the U.S. Internationally, the company added 2.43 million subscribers in Q4, compared to 1.74 million in Q4, 13 and 1.81 million in Q4 '12. However, in the U.S. Netflix added 1.9 million subscribers, down from 2.33 million in Q4 '13 and 2 million in Q4 '12.
Overall the company added 4.33 million subscribers in Q4 '14, slightly ahead of last year's Q4 of 4.07 million, to end the year with 57.4 million subscribers (39.1 in the U.S. and 18.3 internationally).
When Netflix reported its disappointing Q3 '14 results, in particular its 980K U.S. subscriber additions, it said that the culprit was the recent price increase. Netflix has reversed that explanation, saying (somewhat surprisingly) that "growth in net adds is strongest in the lower income areas of the U.S."
Netflix now believes slower U.S. growth is "a natural progression in our large U.S. market as we grow." While one way to interpret that is as an acknowledgement that the U.S. market is beginning to be saturated, on the other hand, Netflix also said that "there is big growth ahead in the U.S. market for Netflix."
Regardless, increasingly Netflix's story is centered around international growth. The company announced an aggressive expansion, to an incremental 150 countries over the next two years, bringing to 200 the total number of markets Netflix will operate in. When Netflix wraps up its international expansion, it believes it can "generate material global profits" beginning in 2017.
Netflix didn't say anything specific about its international expansion beyond a planned launch in Australia and New Zealand in late Q1. For China, the biggest market Netflix has yet to enter, Netflix said it is still exploring options, "all of them modest." Netflix cited numerous scale benefits as its motivation for expanding internationally.
Meanwhile, on the content front, Netflix said its originals cost less money, relative to its viewing metrics, than most of its licensed content. As such, it will continue to dedicate a growing percentage of its content spend to originals over the next few years. Netflix intends to borrow more to finance these content initiatives. In 2014, Netflix will debut 320 hours of original content, which is 3x the level of 2014.
Originals are becoming a battlefield, as Amazon, in particular, has also lately been ramping up its originals agenda. Together with Hulu's efforts, plus tons of original content coming from the YouTube ecosystem and elsewhere, plus local originals in international markets, the competition for eyeballs is going to be more intense than ever. Netflix continues to see its differentiator as being an ad-free service, with piracy actually being one of its biggest competitors.