By : Erik Gruenwedel | Posted: 01 Mar 2010
Despite the hyped migration toward digital distribution, Netflix expects DVD rental shipments this year to increase 18%.
Speaking at separate investor events Feb. 25 and March 1 in San Francisco, CFO Barry McCarthy said packaged-media rentals grew double digits in 2009, while there was 127% year-over-year growth in streaming of at least 15 minutes per month.
McCarthy said Netflix continues to drive subscriber growth by catering to individual movie tastes across a wide spectrum, not just new releases.
“It’s the demand creation process that drives the profitability in the business,” McCarthy said. “That’s the secret sauce. And it will be very important for us to extend that secret sauce into the digital world because digital unlocks unlimited content consumption.”
Indeed, hosts at the Morgan Stanley event March 1 said internal research concluded that Netflix-enabled devices, including the Xbox 360, Sony PlayStation 3 and Nintendo Wii, could be found in 44% of U.S homes — the highest market penetration outside of cable and satellite.
McCarthy said the data reflected the importance of improving the streaming user-interface (UI).
“What we learned this year is that small improvements [updated movie lists on the Xbox 360] in the UI can result in dramatic increases in consumer consumption in streaming content,” he said. “Once that user interface was pushed, it was much easier for [users] to find content and they became much more actively engaged.”
McCarthy said ongoing store closures of Blockbuster, Movie Gallery and Hollywood Video locations had little bearing on the company’s ability to secure improved license agreements with studios.
“Our studio relationships are entirely about how much money we do or don’t pay them, and how good of a partner we are at the negotiating table,” he said. “We are very focused on maintaining health supplier relationships independently of what’s happening in the macro world.”
Indeed, McCarthy said there exists “constant tension” between how much earnings growth Netflix can produce and how much future growth the company invests in the form of additional licensed content and other costs.
Netflix offers streaming as a value-add to subscribers.
“It’s a very big tax on the current profitability of the business,” McCarthy said.