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Netflix Eying Content From HBO, Showtime and Epix

27 Jan, 2010 By: Erik Gruenwedel

Netflix founder and CEO Reed Hastings said the by-mail DVD rental pioneer is interested in acquiring content from HBO, Showtime and Epix, among others, as opposed to outbidding them for studio content directly.

The Los Gatos, Calif.-based service currently has a distribution deal for studio movies from Starz.

“We are focused on being a distributor,” Hastings said in a Jan. 27 call with investors. “That’s the relationship we want, as opposed to bidding against them.”

He reiterated the premise for entering into a new distribution deal with Warner Home Video that delays new releases 28 days, saying the embargo has little impact on consumers.

“Most consumers are not sure if DVDs comes out 90 days after the theatrical release, or 120 days … 150 … 180, it is all over the map,” Hastings said. “There is not a high expectation of any perfect [release] day that a movie is supposed to out.”

Indeed, Netflix said the most recent data indicated that just 27% of subs coveted new releases, compared to 73% for catalog.

Hastings said there does continue to competitive risk if Redbox and other kiosks are allowed to get new releases day-and-date.

The CEO said he wasn’t sure what would happen with video stores since they appeared to be disappearing in record numbers.

“They are closing so quickly [day-and-date] may not be so relevant in the next couple of years.

That said, Hastings cautioned that Netflix would likely never be able to obtain streaming content day-and-date with the DVD, which he said bodes well for its dominant by-mail packaged-media subscription service.

“The strategy is not focused on how to get the newest releases in streaming, it is more how do we get … that vast catalog and make it relevant to each consumer.”

He said a positive to the most recent Nintendo Wii deal is that all 26 million units sold to date already have wireless capability and can be easily retrofitted to accommodate streaming.

The CEO said video game systems and laptops remain the short-term push for Netflix streaming, followed by connected Blu-ray Disc players, TVs and related devices.

He expects that two-thirds of Netflix subscribers will be streaming at least 15 minutes per month in the next 18 months.

Hastings said that while the long-term goal is to pay incrementally less each year for packaged media costs, substituted by streaming, he said it was too early to tell if their were subs just opting for streaming versus a hybrid physical/digital rental relationship.

“We don’t have a good control set of subscribers that don’t get streaming,” he said.

Wall Street, apparently relieved that earlier concerns about possible subscriber growth softness proved untrue, rewarded Netflix by sending shares up nearly 17% to $59.43 per share in after-hour trading.

Another quarter and another stellar result for online DVD rental pioneer Netflix.

The company reported fourth-quarter (ended Dec. 31) net income of $30.9 million, up 36% from net income of $22.7 million during the prior-year period.

Netflix ended the quarter with nearly 12.3 million subscribers, which represented a 31% increase from a base of nearly 9.4 million subs a year ago, and a 10% sequential growth from the end of the third quarter.

Citing the continued popularity of streaming, Netflix said it added nearly 1.2 million net subscribers in the quarter compared to 718,000 net subs the previous year. As previously mentioned, the percentage of subs who watched at least 15 minutes of streamed content in the quarter was 48%, compared to 28% the previous year, and 41% in the third quarter.

Subscriber acquisition costs dropped 5.4%, to $25.23 per gross subscriber from $26.67 per gross sub the previous year. Churn, or attrition rate of subscribers, fell to 3.9%, compared to 4.2% the previous year.

“The service is fundamentally better than it was two or three years ago because of the streaming,” Hastings said. “That increased attractiveness makes it easier to sell.”

Revenue for the quarter increased 24% to $444.5 million, compared to $359.6 million the previous year, and a 5% increase from revenue of $423.1 million in the third quarter.

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