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Analyst: Postage Cuts Not Enough to Pay for Netflix Streaming Content

9 Dec, 2010 By: Erik Gruenwedel

Netflix’s projected cost savings from transitioning subscribers to streaming from physical discs won’t be enough to pay for burgeoning content costs, an analyst said.

Los Gatos, Calif.-based Netflix currently pays more than $600 million annually in postage fees for its first-class disc mailers.

The company’s push toward a streaming-based service would substantially reduce postage and labor costs associated with physical distribution, but not enough to offset the digital license fees that are expected to range from $200 million to $600 million a year just for TV content, according to analyst Michael Pachter with Wedbush Securities in Los Angeles.

Pachter said reported costs associated with the renewal of the Disney/ABC TV agreement underscore a significant and aggressive shift in Netflix’s content acquisitions.

“In our view, the Disney/ABC content constitutes around 25% of the total television content Netflix intends to offer,” he wrote in a note.

With license fees for a new deal with Starz Entertainment expected to cost at least $200 million a year, Pachter said postage reductions would not be enough to pay for the content.

“And we think the emergence of streaming competition (Amazon) could drive content costs even higher,” he said, adding Netflix will be challenged to grow subscribers at its current pace for more than a year.

“Once the installed video game console base is saturated [domestically and in Canada], we expect dramatically slower addition of new subs from console purchasers,” Pachter wrote.

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