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Analysts Say Netflix Streams Embolden Studios, Digital Window

25 Jan, 2010 By: Erik Gruenwedel

Netflix’s goal to sustain growth through streaming to new and current subscribers has elicited a strong response from studios and underscored an emerging digital window, analysts say.

Los Gatos, Calif.-based Netflix, which recently agreed to a 28-day embargo for new release titles from Warner Home Video in exchange for greater copy depth and streaming access to the studio’s catalog, is expected to sign a number of additional streaming deals this year as it attempts to appease studios with a greater percentage of its profit margins, said analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles.

“The new release window may erode Netflix’s market share in favor of Redbox in the future, as the latter can secure new titles through retail workarounds,” Pachter said in a Jan. 25 note.

The analyst said he projects Netflix’s revenue growth to fall below 20% over the next several years, with downward pressure on average revenue per subscriber as increasing numbers of members join just for streaming and not DVD/Blu-ray Disc rentals.

Pachter, who maintains an “underperform” rating on Netflix shares, still expects the service’s recent consumer electronics partnerships to drive 750,000 new annual subscribers.

“We think that subscriber growth swelled at year-end at the expense of Blockbuster,” he said.

Blockbuster last week said its December results fell significantly below expectations.

Separately, Ralph Schackart, analyst with William Blair & Co. in Chicago, said Netflix’s new deal with Warner Home Video afforded greater opportunities for digital distribution of movies, notably through Sonic Solution's CinemaNow downloading technology.

Schackart, who covers Sonic, said the 28-day embargo imposed upon Netflix by Warner could accelerate digital adoption, effectively creating a digital window for movie rentals and sellthrough.

The analyst cited last week’s availability of embargoed titles The Invention of Lying and Whiteout via CinemaNow and Amazon video-on-demand for $3.99 each as proof of an emerging new window.

“Some industry insiders have doubted digital sellthrough and rental’s ability to offer digital titles when a studio embargoes it in physical DVD,” Schackart wrote in a note. “[We believe] a digital window is opening.”

Netflix reports fourth quarter and fiscal year 2009 results Jan. 27.



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