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Netflix CFO: DVD Key to ‘Compelling’ Streaming Offering

25 Feb, 2009 By: Erik Gruenwedel


Buoyed by strong subscriber growth attributed in part to its free Watch Now streaming service, Netflix CFO Barry McCarthy Feb. 25 told an investor group that by-mail DVD rentals remain key to providing a “compelling” consumer proposition.

Speaking at Jeffries Internet & Media conference in New York, McCarthy said growth of the streaming business depends on numerous variables, including how fast consumers have access to devices in the home that enable them to stream content on their TV.

To Wall Street analysts seeking to stoke the flames of burgeoning digital distribution of movies in place of DVD, McCarthy offered little grist other than an analogy involving rival Blockbuster Inc.

“When I got into this business in 1999, everyone thought Blockbuster would be put out of business by streaming,” he said. “And they do have their challenges, but none of them relate to streaming. We are going to be in the DVD business for a long time, probably much longer than most of you in the room imagined.”

That said, McCarthy reiterated what CEO Reed Hastings mentioned in previous financial calls, namely that the Los Gatos, Calif.-based online DVD rental pioneer envisions launching a standalone streaming business someday in the future. But the executive admitted that costs associated with licensing newer content and undetermined pricing models and revenue growth margins hampered a quicker rollout.

McCarthy said the adoption rate for streaming would be paced by the growth in the number of platforms that enable users to consume the content on the TV. He said devices such as Web-enabled video game systems, Blu-ray Disc players and Web-enabled TVs tend to be purchased during the Christmas shopping season.

“It is many, many, many years of Christmas selling seasons before enough of those devices populate people’s homes to matter,” he said.

He said that it took the DVD player five years to go from $300 to $35 and reach 50% household penetration.

“These [streaming] devices will not grow that quickly,” McCarthy said.

He said the Watch Now streaming option with limited content, despite the hype, is not compelling enough as a freestanding basis. But when packaged together with the 100,000 DVD titles does offer a better value proposition, according to McCarthy.

“We seek to exploit as a competitive advantage what many people for many years perceived to be a ‘buggy whip company,’ which was the DVD-by-mail business,” he said.

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