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Analyst: Game Console Price Cuts a Boon to Netflix

28 Sep, 2009 By: Erik Gruenwedel

Sony Computer Entertainment America’s $100 price cut to the PlayStation 3 video game system should drive subscriber growth for online DVD rental pioneer Netflix, a Wall Street analyst said. But the result would primarily stem from Sony’s price cut forcing Microsoft to drop its price on the Xbox 360.

Eric Wold, who covers Netflix for Merriman Curhan Ford & Co. in New York, said Sony’s price cut was immediately emulated by rival Microsoft, which slashed $100 from the Xbox 360 Elite system, which he said would likely result in incremental subscriber growth for Netflix.

A year ago, when Microsoft and Netflix first announced their partnership with Xbox Live, the news generated more than 1 million new Netflix subscribers in less than four months.

Los Gatos, Calif.-based Netflix does not have a streaming deal with Sony — a scenario many say isn’t likely change with the existing Netflix-Microsoft partnership.

Indeed, Wold said he projects Netflix will add 5.3 million gross subscribers (excluding non-renewals and terminated memberships) during the fourth quarter of this year and first quarter of 2010, which represents a 18% increase over the 4.5 million gross subscriber additions in the 2008 holiday period.

“Netflix is positioned to continue to benefit from the market share shift within the home video rental industry away from brick and mortar locations to online subscription and rental kiosks,” said Wold in a note.

The analyst, who maintains a “buy” position on Netflix shares, said Blockbuster’s recent announcement that it would shutter about 1,000 stores in the next two years would further migrate DVD rental consumers to Netflix and $1-per-day rental kiosks, spearheaded by Redbox.

“During this recessionary environment, we believe consumers are less likely to cancel Netflix versus other purchase decisions, which should create stability in its revenue stream,” Wold said.

The analyst is projecting “better than average” earnings per share growth for Netflix over the next two years.

Separately, Tim Beyers, with online financial-services company The Motley Fool, said Netflix CEO Reed Hastings would be wise to follow through with last week’s musings to Reuters about linking its service to the Apple iPhone.

The analyst said Apple couldn’t count on video-sharing behemoth (and iPhone app) YouTube not dabbling in movie rental streams in the future. Netflix would be a good counter to that move. Earlier this month, The Wall Street Journal reported that YouTube was in talks with studios to begin offering movie rental streams for the same price currently charged for streams by iTunes.

Google-owned YouTube reportedly attracts 100 million unique visitors a month just in the United States.

“This model can't last if YouTube becomes a rental hub, and that creates an opportunity for Netflix,” Beyers wrote online.

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