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At Netflix, International Is the New Black

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Netflix Earnings
The Netflix Inc. app on an Apple Inc. iPhone 5s including "Orange is the New Black" series on July 9, 2014. "House of Cards," and "Orange Is the New Black," two Netflix Inc. series that have boosted the popularity of online viewing, will compete for television's top honors as nominees for Emmy awards in drama and comedy. Photographer: Andrew Harrer/Bloomberg

The red envelope is fading fast, but Netflix's budding international streaming business is making up for lost revenue.

While Americans subscribing to Netflix's online-video service contribute the majority of sales, the other 40 or so countries where streaming is available are growing quickly. Netflix added 1.12 million international subscribers in the quarter that ended in June, nearly double the additions in the U.S. during the same period, the company said in its earnings report today. That could jump higher next quarter as Netflix prepares to debut streaming in six new markets, including big ones such as Germany and France.

Meanwhile, more Americans are dropping their DVD-by-mail plans. Last quarter, 391,000 people abandoned the disc rental service, which costs at least $8 a month. Perhaps the more surprising number is that 6.26 million people still get DVDs, despite what seemed like Netflix's many efforts to kill the service in recent years. Some longtime subscribers still shudder at the word Qwikster.

Netflix International Streaming vs. DVD

Overall, Netflix's performance last quarter was strong, helped in part by the new season of its original show "Orange Is the New Black." Global subscribers crossed 50 million, just over a quarter coming from outside of the U.S.

Non-U.S. streaming revenue passed the DVD-by-mail business at the end of last year. When measured by the number of subscribers, the shift happened a couple of quarters earlier. That gap represents a larger issue for Netflix — how to squeeze more money from overseas customers and get the international business out of the red.

Global streaming is unprofitable for Netlfix, though less so last quarter than in previous ones, according to the earnings report. Netflix sees the less-bad numbers as evidence that the international model will work, and so it's bracing shareholders to see more losses from that business next quarter — to the tune of a projected $42 million. David Wells, the company's chief financial officer, said on the call that streaming overseas should eventually be just as profitable, if not more so, than the U.S. (He seemed to indicate that China isn't coming anytime soon.)

In the meantime, Netflix will spend on regional content and hiring employees in each market. Ted Sarandos, the chief content officer, said 10 to 20 percent of streaming videos available in each country are expected to be catered to locals. Netflix CEO Reed Hastings joked that they'll need to find a French Kevin Spacey to do a "House of Versailles."

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