Netflix Intends to Use House of Cards to Take Over the World

Updated from 8:34 a.m. to include updated share price and news about Amazon's HBO deal.

NEW YORK (TheStreet) -- Netflix (NFLX) is the dominant streaming service in the United States, with more than 35 million (and counting) subscribers. Now the company plans to take over the rest of the world, starting with Europe.

Netflix announced Wednesday that it plans to "significantly expand in Europe later this year, offering a wide-range of entertainment for a low monthly price in Germany, Austria, Switzerland, France, Belgium and Luxembourg." 

Netflix currently has more than over 48 million members in more than 40 countries who watch more than 1 billion hours of content per month. In recent years, Netflix has been expanding internationally. In 2012, Netflix launched in the U.K. and Ireland, Denmark, Finland, Norway, and Sweden. In 2013, the company started services in the Netherlands.

Shares of Netflix were higher in trading on Wednesday, gaining 1.66% to $377.85.

In a press release, Netflix didn't disclose pricing, programming and supported devices, noting that the information "will be available at a later date."

Though Netflix didn't announce pricing for the additional European markets, it's clear new consumers will have to pay more than previous consumers. Embedded in the first-quarter letter to shareholders, CEO Reed Hastings said there will be an increase for new members of $1 or $2, depending on the country.

"Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period," Hastings noted. "These changes will enable us to acquire more content and deliver an even better streaming experience." On the call, Netflix said that most of the increase in revenue from the price increases would go toward spending on original content. The revenue increase in the short-term would be "modest."

On the conference call to discuss first-quarter earnings, CEO Hastings continued to reiterate that Netflix's total addressable market in the U.S. is between 60 million and 90 million households, but throughout the world it's "everyone who loves TV and has the Internet."

Los Gatos, Calif.-based Netflix earned 86 cents a share on $1.27 billion in revenue for the first quarter. Analysts surveyed by Thomson Reuters were expecting the company to earn 83 cents a share on $1.266 billion in revenue for the first quarter.

Netflix's international presence and performance continues to strengthen, Hastings said in the letter to shareholders. Netflix added 1.75 million international subscribers during the quarter, bringing its total to 12.7 million members.

"Due to rapid growth in our international segment we aren't experiencing the same level of seasonality as in the U.S., and we anticipate over 50% y/y growth in Q2 net additions despite slight headwinds from the World Cup," Hastings said in the letter.

These moves serve to address that strength and will continue to push the ball forward, even if it means losses in the company's international segment. Hastings noted the company is on a path to achieve profitability this year from its international ventures, but through continued and substantial expansion in Europe, along with investments in content and marketing, the unit will operate at a net loss.

By expanding, Netflix is taking on Amazon's (AMZN) Lovefilm unit, which already has a sizable market in Europe, particularly in Germany.

Amazon is also expanding its offerings in Netflix's home market, the U.S., despite Hastings referring to Amazon as complimentary to Netflix. Amazon recently signed a deal with HBO to bring older HBO content to Amazon Prime Instant Video consumers, including shows such as The Sopranos, The Wire, and others. On Wednesday, Amazon announced the first wave of this content would be available.

Despite these headwinds, it's clear consumers are taking to Netflix, especially during peak Internet hours. Research firm Sandvine noted Netflix accounted for 34.2% of downstream traffic during peak traffic time, up from 31.6% in the second half of 2013. The Sandvine report said the increased traffic was being driven by "the availability of higher bitrate Super HD content to all subscribers, while in our 2H 2013 report it was only available to subscribers on networks where Netflix's OpenConnect CDN appliance had been installed."

As Netflix continues to expand into new markets, it will need to continue to spend on content, as the company's hit series House of Cards, Orange Is the New Black, and others in the pipeline resonate well with consumers. On the earnings call, Chief Content Officer Ted Sarandos noted Orange is the company's most popular show, heading into its second season which starts next month.

With Netflix paying "a couple of billion" for content a year, BTIG analyst Rich Greenfield said at a recent streaming conference that the company has to evolve to becoming an original content creator, similar to what Time Warner's (TWX) HBO has done, because of how expensive it has gotten in recent years. 

It won't happen overnight, however.

"It comes down to content," Greenfield said, when asked whether Netflix has room to raise prices even more. "If it's great content people will find it. People will pay for it. There's something new on HBO every month, and Netflix, they're shooting to be that. HBO started out with Dream On, and now it's on Game of Thrones. Netflix is making progress, but it's not going to happen overnight.'

Also See: Why Netflix Is Raising Prices

Also See: Netflix Proves Cash Is King When It Comes to Content

Also See: Why Netflix Will Cost More Now

--Written by Chris Ciaccia in New York

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