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Netflix CFO Applauds Blockbuster Store Closures

17 Sep, 2009 By: Erik Gruenwedel

Barry McCarthy, CFO of Netflix, applauded efforts by the No. 1 DVD rental chain — and Netflix competitor — Blockbuster Inc. to shutter upwards of 1,000 stores through next year.

Speaking Sept. 16 to an investor group in San Francisco, McCarthy, who has not shied away in the past from sardonic criticism of Blockbuster’s efforts in the by-mail movie rental space, said the rival’s desire to slash costs related to brick-and-mortar operations made economic sense.

“Blockbuster has been battling a headwind trying to right-size their capital structure,” McCarthy said. “And it looks like they have made some important strides in making that happen. So congratulations for them.”

The CFO said he wasn’t sure how Redbox would fare in its quest to extract content from the studios on its financial terms. McCarthy said he wouldn’t be surprised if the rental kiosk market leader ended up paying more for content and how, or if, that would affect DVD sellthrough.

He said that if Blockbuster’s kiosk strategy attempts to compete against Redbox on price it would be “competitively challenged.”

McCarthy said he had heard that Blockbuster receives about 5 cents from kiosk manufacturer NCR Corp. for each rental transaction. NCR, which also owns kiosk brands MovieCube and The New Release, is covering the bulk of upfront costs associated with the rollout and transition of about 10,000 Express kiosks through 2010.

“If it is really 5 cents per transaction, okay, whatever,” he said.

The executive reiterated that the future success and stock price of Netflix would be predicated on its success or failure with streaming, which about 2 million (out of 11 million) subscribers currently use.

McCarthy said he worries more about digital content sites such as Hulu, Amazon VOD, YouTube and Apple iTunes.

“Right now we are doing open-field running and making a lot of progress,” he said. “If our [streaming] business is successful, it is hard to imagine that someone won’t challenge us like they did with DVD.”
McCarthy said Netflix remained very supportive of Blu-ray, but that the company’s ability to push the format is limited.

“If the customers want to go there, we will have enough inventory to make it as good an experience as standard-definition DVD,” he said.

The CFO said revenue-sharing agreements with the studios have varied from as much as a 60% cut for Netflix to as low as 40%. He said some of the rev-share agreements are more expensive than others — a reality McCarthy said has prompted Netflix to encourage greater demand for the less expensive rev-share content as well as content Netflix buys at a lower price.

He said Netflix was the largest source of licensee fees paid to studios for subscription-based movie and TV content. McCarthy said the studios would continue to license content to Netflix because the fees paid greatly exceed anything they are receiving from YouTube and Amazon-based digital services.

“They don’t matter,” he said.

Separately, Newman’s Own through March 2010 will give two free pizzas to new Netflix subscribers in New England, Albany, N.Y., Baltimore, Washington, D.C., Charlotte, N.C., Atlanta, Minneapolis, Milwaukee, Denver, Phoenix, Portland, Ore., Seattle, and California.

The program offers a two-week free trial with Netflix; upon conversion to a paying membership, participants will receive coupons for the two free pizzas.

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