Online streaming is the way to go these days and many sites are competing to come first. The top contender is NetflixInc. (NASDAQ:NFLX), facing off against the king of online streaming, Home Box Office Inc.
CEO Hastings stated Home Box Office Inc. was their biggest rival; many found this amusing. But this statement was proved true when Netflix Inc. (NASDAQ:NFLX) targeted original productions, which have been Home Box Office Inc.’s forte. Famous and well-known series like Game of Thrones, Boardwalk Empire, True Blood, Entourage and many more play a part in Home Box Office Inc.’s success. Netflix Inc. (NASDAQ:NFLX) started airing original productions which include House of Cards, Orange is the New Black, Hemlock Grove and others which brought NetflixInc. (NASDAQ:NFLX) to the front and directly up against Home Box Office Inc.
Home Box Office Inc. retaliated by offering over-the-top streaming, a service which Netflix Inc. (NASDAQ:NFLX) is famous for. Over-the-top streaming enables users to watch the episode soon as it is aired. Netflix Inc.(NASDAQ:NFLX) has surpassed Home Box Office Inc. on more than one occasion. In the first quarter of 2013, Netflix Inc. (NASDAQ:NFLX) had more domestic viewers than Home Box Office Inc. and in the second quarter of same year, Netflix Inc. (NASDAQ:NFLX) also surpassed Home Box Office Inc. in revenue.
But here’s the thing,Home Box Office Inc. has been around for forty three years and is ahead of NetflixInc. (NASDAQ:NFLX) in profits and subscribers. Home Box Office Inc. has more subscribers (including both domestic and international) and if we include Cinemax, a movie-based channel which broadcasts movies only, then the number of subscribers equals to 138 million whereas Netflix Inc. (NASDAQ:NFLX) reported 57 million subscribers in its last report.
If we look at Home Box Office Inc. closely, then we notice that a major amount of Home Box Office Inc.’s profits is generated from international subscriptions. Around 70% of Home Box Office Inc.’s subscribers are from out of the US. HBOis available in over 60 countries and their content is permitted to run in 150 countries while NetflixInc. (NASDAQ:NFLX) is available in 50 countries and is aiming to authorize their content to be broadcast in 200 countries.
Using Home Box Office Inc. as a reference, Netflix Inc. (NASDAQ:NFLX) should concentrate its efforts on the global market. Netflix Inc.’s (NASDAQ:NFLX) subscriber growth increased by 67% but they faced a loss of $160 million in the international segment due to minor subscriber base and expansion costs. This loss will persist for a little while, but the majority of it will be covered up, since a third of Netflix Inc.’s (NASDAQ:NFLX) subscribers are from out of the U.S.
Also, Netflix Inc. (NASDAQ:NFLX) should consult the number of Home Box Office Inc.’s subscribers as a benchmark and the number of international users should be two times more than the domestic ones which would mean that if the number of domestic users was 70 million, then international users would be 140 million, a total of 210 million subscribers for Netflix Inc. (NASDAQ:NFLX). CEO Hastings has set a contribution margin of 40% for Netflix Inc. (NASDAQ:NFLX) until 2020, which would mean that the company hopes to generate a total of $10.8 billion.
Spending is 13.4% of the total revenue, which leaves operating profits of $8.7 billion. If we subtract interest expenses and taxes from the operating profits as well, this would leave Netflix Inc. (NASDAQ:NFLX) with a net income of $5.8 million. Keep in mind, all calculations have been made keeping in mind the Home Box Office Inc.model.
All of this won’t happen in one night, of course. Demand for home entertainment is always out there and if Netflix Inc. (NASDAQ:NFLX) applies the same strategy as Home Box Office Inc., it will succeed overseas like HBO did.