Netflix Poised to Pass HBO in Paid U.S. Subscribers

Netflix Inc. is poised to pass HBO in paid U.S. subscribers, showing Chief Executive Officer Reed Hastings is making progress toward a goal of transforming the streaming service to a Web-based television network.

Netflix, based in Los Gatos, California, reports third-quarter results today after markets close. Already the world’s largest subscription-video service, the company probably reached 30 million paying U.S. customers as of Sept. 30, according to Needham & Co. HBO, Time Warner Inc.’s premium cable-TV network, has about 28.7 million, according to researcher SNL Kagan.

Hastings has hooked viewers with the Emmy-winning original series “House of Cards” and a library of films and TV shows. To fuel more growth, Netflix is looking to bring its Web-based service to cable-TV systems. Cable providers are starting to see the $8-a-month subscription as an asset, and some are working to integrate Netflix with traditional programming.

“Consumers are probably going to come to see Netflix as being more valuable than other networks,” said Tony Wible, an analyst at Janney Capital Markets in Philadelphia. The monthly price “makes it very difficult for others to be in the business.”

Netflix is in talks with U.S. cable providers including Cox Communications Inc., Suddenlink Communications, RCN Telecom Services and Atlantic Broadband Finance LLC, people with knowledge of the situation said last week.

Including free trials, Netflix’s U.S. subscribers probably reached 31 million in the third quarter, the average of eight analysts’ estimates compiled by Bloomberg. That’s an increase of about 4 percent from 29.8 million as of June 30. Paid users were 28.6 million in the second quarter.

HBO’s Path

Analysts project profit, excluding some items, rose to 63 cents a share from 13 cents a year earlier, on sales that grew 21 percent to $1.1 billion.

To reach Hastings’ goal of becoming a Web-based TV network, Netflix is following HBO’s path. Thirty years ago, HBO aired its first original movie, a 1983 biopic of Canadian amputee and runner Terry Fox. Like HBO, Netflix has used original programming to build customer loyalty and to stand out from competitors such as Inc., the largest Web retailer, Hulu LLC and Redbox Instant by Verizon.

Hastings has called “House of Cards,” which won the Emmy for director David Fincher, “Orange Is the New Black” and other originals integral to his strategy of moving from reruns to a mix of Hollywood movies and new shows. Sony Pictures Television will produce a psychological thriller for Netflix, the company said on Oct. 14.

More Use

Currently, these shows are funneled to televisions through users’ video-game consoles or standalone devices such as Apple TV or Roku Inc.’s Web-connected box. Viewers can also watch on their smartphones or tablets. Adding Netflix’s application to cable menus will make it easier for customers to watch, Wible said.

“There’s nothing to stop somebody who has a cable plan today from getting Netflix, but people will use it a lot more if it’s integrated into the set-top box,” Wible said.

Netflix rose as much as 4.7 percent today from an all-time closing high of $333.50 on Oct. 18. The shares added 3.5 percent to $345.32 at 10:21 a.m. in New York, after reaching an intraday record of $349. The stock has almost quadrupled this year, the largest gain in the Standard & Poor’s 500.

Investors are also looking for Netflix to spur international growth. Hastings has suggested the company, which had 37.6 million viewers worldwide as of June 30, can reach 60 million to 90 million over time. If the company can reach domestic and international targets this quarter and next, it could reach 43.8 million by the end of this year, and cement views that subscriptions can reach at least 50 million, said Scott Devitt, an analyst at Morgan Stanley.

Pricing Policy

Devitt, who rates Netflix equal-weight, estimates the company added 2 million total subscribers in the third quarter and projects an additional 4.2 million in the fourth quarter.

Even should the company meet its growth targets, some analysts caution that unless Netflix raises prices and adjusts policies that make it easy to quit the service, it will be harder for Netflix to generate ongoing profit.

With tiered pricing, where people who stream a lot pay more, Netflix’s model might be more sustainable, said Laura Martin, an analyst with Needham & Co. who rates the stock buy and projects the shares will reach $425.

“The more hours a household watches Netflix, the faster Netflix’s value proposition falls, and the lower the probability of renewal the next month,” Martin said.

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