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MBA Exclusive: Netflix Bets Big On 2017

Netflix, the world’s biggest SVOD operator, ended 2014 with 39.1 million subs in the US and 18.3 million across international markets.

The company plans to complete its international build-out by 2017, with launches in Japan and Korea expected to join that of Australia and New Zealand in Asia-Pacific in the near term.

Such global expansion will be funded by US$1 billion in long-term debt, with company management targeting “material" global profits in 2017. This will be based on robust but slowing customer growth in the US, albeit at higher yields, combined with more dynamic subscriber expansion in international markets.

Also, expect more integration with advanced pay-TV operators, similar to its existing tie-ups in the US (i.e. Dish Network) and Europe (Virgin, BT and Deutsche Telekom).

Worldwide rights

Significantly, as highlighted by chief content officer Ted Sarandos on a Jan. 20 earnings call, Netflix is scaling up global licensing deals, as it looks to acquire rights for franchises that travel well across the world.

"I think our success with Better Call Saul and Gotham, where we licensed for all of our operating territories and our future operating territories directly with the producers of those shows [Better Call Saul with Sony; Gotham directly with Warner], instead of going country-by-country, is a good example,” Sarandos said.

“This enables us to make a selection for viewers around the world who increasingly know exactly when these shows begin, and are hungry to see them as soon as they can."

Netflix will also continue to invest in more original content, planning 320 hours of its own programming for 2015 (a three-times increase over 2014), including high profile debuts of House of Cards 3 on February 27 and the next Crouching Tiger film on August 28.

Expansion will mean lower earnings this year. In pure economics, the numbers suggest:

  1. Netflix’s total streaming content obligations scaled up to about US$9.5 billion last year, while the company spent US$3 billion cash on content

  2. Ebitda topped US$450 million in 2014 but Netflix continues to generate free cash flow (FCF) losses, which could reverse by 2017

  3. Total turnover topped US$5.5 billion in 2014