Netflix to Focus on Adding Higher-Rated and Exclusive Titles, CFO Says

Finance chief David Wells says negative reaction to price hike has been 'small,' confirms Netflix did not bid for HBO content

Netflix CFO David Wells said the No. 1 streaming service will expand the breadth of its programming over the next few quarters, through original series and with more emphasis on licensing exclusive and “four- and five-star content.”

“Our intent is to continue to expand the content library meaningfully,” said Wells, speaking at the J.P. Morgan Technology, Media and Telecom Conference.

Netflix will spend a projected $3.2 billion in 2014 on streaming content globally. The content mix will shift toward higher-rated and exclusive titles, with “a little bit less depth,” according to Wells — a tacit acknowledgement that Netflix offers a lot of material that is not popular with subscribers. It also will continue to focus on originals, like season two of “Orange is the New Black,” which debuts June 6.

But, he added, the company continues to see expansion in the number of hours viewed on the service, which “is indicative that we are not just substituting content.” According to Netflix, it streamed 6.5 billion hours of video globally in the first quarter of 2014, up from about 5 billion in Q3 2013.

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Wells confirmed that Netflix did not bid for streaming rights to HBO’s library content. Last month HBO entered into a multiyear pact with Amazon.com, which analysts pegged as worth at least $200 million, for exclusive subscription VOD rights to past seasons of the premium cabler’s originals like “The Sopranos” and “The Wire.”

“To my knowledge, (HBO) didn’t shop it,” Wells said. He added that the deal was a good one for HBO, speculating that the cabler was probably not getting a lot of HBO Go usage for the older series and that it needed a way “to reach the cord-never market.”

Netflix earlier this month raised prices for new subscribers in the U.S., by $1 per month to $8.99 for the standard two-stream plan, as well as overseas. Current customers are grandfathered into their existing plans for two years, in most markets. Wells said early reaction to the hike has been “generally as expected. We expected a small reaction, and I think we’ve gotten that so far.”

The additional revenue from the price increase will allow Netflix to add more content, while also expanding margins. Wells said Netflix’s content spending will rise more slowly than revenue, with the company targeting streaming margins of 30%. In the first quarter of 2014, Netflix reported a streaming margin of 25.2% for the U.S. (while its international business had a negative margin of 13.1%).

Wells, asked about Netflix’s plans for a “substantial” expansion in Europe, declined to identify the target markets, saying the company expects to announce those in the coming weeks. Netflix is widely expected to launch this fall in France and Germany, among other territories.

Also at the conference, Wells reiterated that Netflix is concerned that Comcast’s pending $45 billion acquisition of Time Warner Cable will concentrate too much control over U.S. broadband with one company. Netflix earlier this year agreed to pay Comcast — reluctantly, the streamer said — to interconnect directly with the MSO’s networks.

“If you had competition, I’m not sure you’d have the ability to [charge a] toll [from] that content provider,” he said.

AT&T’s bid for DirecTV is less worrisome for Netflix, Wells said. “We’re mostly concerned about consolidation on the broadband side, not necessarily on the video side,” he said, adding that AT&T’s promise to roll out broadband to an additional 15 million homes is a potential plus for Netflix.

Netflix will continue to lobby the Federal Communications Commission for network neutrality rules that govern terms of how ISPs allow access to their networks from content companies. “Our interest is in a definition of net neutrality… that encompasses all things that affect delivery to a consumer,” Wells said.