Netflix has Reasons for Optimism Despite Uncertain Outlook

The streaming service posts shaky figures but has high hopes for exclusive content.

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Arrested Development was canceled after three seasons, but its return could bolster one top tech company.

Netflix is set to air a new season of the popular series—that much is certain. However, the company's future subscriber numbers are uncertain, as it reported a mixed second-quarter earnings report Tuesday.

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On the plus side, the company announced a profitable quarter, adding $6 million and over a million new subscribers globally, with expectations to be profitable again in the third quarter, as CEO Reed Hastings and CFO David Wells wrote in a letter to investors.

Then again, the company's second-quarter profits plummeted by 91 percent, and the company also acknowledged that it may miss on growth targets. For the third quarter, the company has targeted 1 million to 1.8 million new domestic subscribers, but if Netflix doesn't hit the "high end of that range," said the letter, "it would be challenging" to hit the year-end goal of 7 million new subscribers. Last quarter, the company only added around half a million new domestic subscribers.

The investor letter also cautioned that the Olympics are likely to hurt viewing and sign-ups, and that expansion into international markets would likely temporarily tip the company into the red in the fourth quarter.

All of this makes for an uncertain investor outlook. Shares on Tuesday were driven downward in after-hours trading because of "waffling around the streaming guidance domestically for the year, and the notion that the launch of another international market in Q4 will push the company back into an operating loss," as Steve Frankel, an analyst at Minnesota investment firm Dougherty & Co., told Reuters Tuesday.

Still, there is reason for optimism with the streaming service, and part of it can be seen in Fox's canceled sitcom. Arrested Development went off the air in 2006, but it still boasts devoted fans. Netflix is hoping to profit off of that fan loyalty.

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It's not that the show will singlehandedly boost Netflix to high earnings; the service has plans for other exclusive programming, like the Kevin Spacey vehicle House of Cards. Rather, it's what the show represents—the potential for success in a new marketplace in which Netflix already looms large.

Americans spend 2.8 hours of their day watching TV, spending more of their leisure time in front of the tube than any other activity, according to the Census Bureau. Netflix, as well as its competitors with their own exclusive content, believes it can leverage that love of TV with new material, not just months-old films and TV episodes.

CEO Reed Hastings is optimistic, saying in a Tuesday call, "We've been very happy relative to the investment on [Netflix original show] Lilyhammer, and so we're feeling quite good about the rise of Arrested Development season four, House of Cards and our other originals."

Netflix has already managed to pull plenty of viewers in; market intelligence firm IHS iSuppli reported earlier this year that the company had a 44 percent market share in the domestic online movie market, up from just half a percent in 2010. In contrast, Apple lost nearly half its share, falling to around 32 percent.

According to one analyst, Netflix has the power to draw people away from their traditional sets.

"[Netflix] is based on the user, and it's all on demand," says Andy Hargreaves, analyst at Pacific Crest Securities. "I think that there is a very, very big role for that type of service in the future."

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There's a big role, and companies are still working to feel out how to fill it. Within this small field dominated by only a few large competitors, there are still broad areas in which top companies can differentiate themselves.

"I think Hulu is more 'Hey, I missed a show the other day and I want to watch it,'" says Hargreaves. "Netflix is 'I never watched any of the seasons of Mad Men. I'm going to get into that show.' "