October 22, 2013 12:10 am

Netflix: stay tuned

Group gains leverage but can it raise its subscription price?

One long year ago when Netflix had just 28m subscribers and a $70 stock price, its concerns were as long as one of its old movie queues. Could it quickly grow subscribers in a world of upstarts such as Amazon Prime, Hulu and iTunes? Was it imperilled by cable companies that could easily create their own on-demand offerings and happened to be the gatekeepers to the high-speed internet pipe that Netflix survived on? Since then it has successfully answered most of those questions and others. But beyond that, it has dramatically gained leverage. Netflix’s partners and rivals may now need it just as much as it needs them.

Netflix boasts 40m streaming subscribers around the world. It added more than 2m in the third quarter. Its shares rallied a 10th in late trading and are up 400 per cent since the beginning of the year. Its earnings per share came in at 52 cents, a few pennies ahead of expectations. Cash flow metrics, perhaps the key measure of performance given the costs of acquiring content, were mixed though. Cash flow from operations of $35m exceeded net income. However, free cash flow was just $7m and fell from the previous quarter. Thus, Netflix has little free cash flow despite a market cap of nearly $25bn.

The worries about cash flow, though, have taken a back seat since the narrative is now that Netflix is a must-have product for TV viewers. It has shown that it can produce shows (House of Cards, Orange is the New Black) that are worth paying a subscription of $8 per month for even if the content it buys remains uneven. Cable companies, fighting their own content cost battles, will consider embedding Netflix in their boxes thinking they might as well sell more broadband. So the questions of leverage are now: can it raise the subscription price and by how much?

Email the Lex team in confidence at lex@ft.com

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