Netflix profits rise ahead of planned price hike

Video streaming service Netflix has said that profits rose again during the first quarter of the year, while it is also planning to increase subscription prices.

In a letter to the company’s shareholders, chief executive Reed Hastings and chief financial officer David Wells said that profits stood at $53 million (£32 million) in the first three months of 2014. Though this is a huge improvement on last year’s figures, it is still a relatively slight return on revenues of $1.27 billion.

As part of a bid to boost these figures, the company has announced plans to increase the cost of subscribing to the service for new customers by between $1 and $2 per month. Since the company is projected to have more than 50 million users signed up to its streaming service around the world by the second half of this year, it is likely that this would make a considerable difference to Netflix’s financial position.

Indeed, by eventually rolling out these higher prices to existing customers too, the company could potentially add between $600 million and $1.2 billion to the firm’s revenues within the next two years.

“These changes will enable us to acquire more content and deliver an even better streaming experience,” wrote Mr Hastings and Mr Wells in their letter.

Long-term investment

At the moment Netflix says it is prioritising investment over returns. In particular, it is working hard to improve its international earnings, which constitute a quarter of the firm’s total streaming revenues. The company’s global membership grew by 1.75 million in the first quarter of the year – 72 per cent more new additions than in the same period of 2013 – and the company eventually expects its international subscribers to outnumber the domestic users.

But the international segment still made a loss in the first quarter as it invested heavily in marketing and expansion into Europe. Overall, this means that even though the company expects its existing international segment will finally make a profit this year, there will still be losses in the expanded zone.

However, Netflix is working on the basis that the effects of its investment in original content such as House of Cards and Orange is the New Black will reap rewards over time.

“As we’ve discussed in prior investor letters, we intend to continue our international expansion over the coming years, so our near term profits will be quite modest as we invest in this large global opportunity,” wrote Mr Hastings and Mr Wells.

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