Netflix Is the Poster Child for Recurring Revenue

Netflix Is the Poster Child for Recurring RevenueLast week was a good week at Netflix. Actually, the run of good times has been going on for a while now, as evidenced by the Netflix Q4 2013 results released last week.

The king of video streaming produced net income of $48 million, or $.79 per share, on revenues of $1.175 billion, beating Wall Street analyst projections. Net new subscribers totaled 2.33 million in the U.S. and an additional 1.74 million in international markets, for a total of 33.4 million subscribers in the U.S. and over 44 million globally.

Those subscriber numbers are mind-boggling. One in ten Americans is now paying for a subscription to Netflix. Now multiply that U.S. number by the 2 or more users on each account (because I don’t know anyone that has a Netflix account and isn’t sharing it with their spouse or their significant other or their kids) and you could be talking about 70+ million consumers actually using Netflix services in the U.S. Why does that matter?

Well, to start with, Netflix is the poster child for recurring revenue and symbolic of the shift in consumer preferences in recent years from a pay-to-own to a pay-to-use model. How many of us have shelves of DVDs and Blu-Ray discs but now watch most or all of our movies streamed over the internet, primarily on Netflix? It’s a change in the way we consume, and this model is becoming more prevalent in many industries. Netflix embodies many of the characteristics that are common for successful recurring revenue offerings.

Netflix subscribers consume over 4 billion hours of streaming video service per quarter on over a thousand different device types. On an average weeknight, Netflix accounts for almost one third of the total internet traffic in North American homes, which is more than YouTube, Hulu, Amazon, HBO Go, iTunes and Bit Torrent combined.

Not to sound too much like a marketing brochure, but with Netflix, you get your content when you want it, where you want it, the way you want it. Netflix also makes extensive use of big data analytics to present each customer with a list of suggestions for future viewing based on previous viewing habits. Netflix believes that they know what you want to view next before you do. In essence, Netflix is trying to create 44-million individualized versions of Netflix, so that each customer gets a highly personalized experience specific to their individual needs and preferences.

Netflix is not content to rest on their laurels. In their quarterly letter to shareholders, CEO Reed Hastings and CFO David Wells indicated that Netflix will expand its original content offerings, enhance its content discovery processes to provide more and better viewing suggestions, accelerate global marketing efforts, and move forward into 4K video; all of this providing more subscribers more reasons to enroll and then stay with the service. Netflix is also test marketing a variety of new pricing plans and will roll out a new plan structure in 2014, while grandfathering in existing subscribers.

So back to our earlier question: why does all this matter? Netflix has become the poster child for what a subscription service should look like, providing a highly personalized service that is easy and convenient to use and focusing on nurturing strong customer relationships.

There are 70+ million consumers who are now growing accustomed to the idea of consuming a service on a pay-to-use basis through Netflix. For millions of consumers, Netflix has become a gateway into the subscription world, their first experience at consuming services rather than buying products. How much more likely are those consumers to purchase other services on a pay-to-use basis, based on their positive experience with Netflix? And given the level of personalized service that they receive from Netflix, what will consumers expect from their next subscription experience? Netflix, along with a few other online pioneers, is setting the standard for customer service in the subscription world.

With success comes imitation. Hulu is bringing prime-time television into the video streaming world. Amazon has been modestly successful in the streaming world and is beginning to move towards creating its own original programming. Redbox is now adding video streaming as part of a subscription-based service. But Netflix is still the 800-pound gorilla in the room and they are setting the bar high for providing a personalized customer experience in the recurring revenue world.

– Bob Harden

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