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Netflix CFO Questions ‘House of Cards’ DVD Impact

15 May, 2013 By: Erik Gruenwedel

David Wells says Sony Pictures Home Entertainment’s pending DVD release of Kevin Spacey political thriller costs more than four months of Netflix service

Netflix apparently isn’t losing any sleep over the upcoming June 11 DVD release of House of Cards: The Complete First Season, from Sony Pictures Home Entertainment.

Speaking May 15 at J.P. Morgan Global Technology, Media and Telecom Conference in Boston, CFO David Wells said that typically Netflix would not want to its original programming to compete against the disc release, but financial considerations when acquiring “Cards” distribution rights precluded ownership.

Sony is selling the first season of the political thriller starring Kevin Spacey, Robin Wright and Kate Mara, for $55.99 SRP, although Amazon is selling it for $33.96. Netflix, which acquired the pay-TV rights to the show, began streaming all 13 episodes Feb. 1.

“Ordinarily, we would not want that to be on a competitor’s service, but when we entered the originals business, it was a conscious decision not to enter with full ownership,” he said, citing the costs required to compensate a program’s producer. “For the cost of the DVD [season] you can be on Netflix for four plus months. So, we’ll see how engaging it is in terms of how many folks buy it.”

Wells said that strategy could change going forward.

Meanwhile, don’t expect Netflix to raise its $8 monthly subscription price in North America anytime soon.

Wells said fallout from the disastrous 60% price hike to its dual streaming, disc rental plan in the summer of 2011 remains front and center on the minds of management. The hike, coupled with an aborted spinoff of the disc business, saw Netflix shares plummet 75% with nearly 1 million subs departing (both metrics have since bounced back).

“We’re still mindful that any negative pricing thing could set that fire off again,” Wells said, adding that management believes there remains “more recovery to be done” going forward.

The CFO said discussions about a price hike are predicated on putting as much time as possible between the PR snafu of July 2011 and the competitive state of the SVOD landscape. Industry scuttlebutt suggests there exists room in the market for an incremental rate increase. Wells acknowledged Netflix recently implemented a small price increase in Brazil.

The executive said content owners have warmed up to SVOD licensing following aggressive spending by Netflix and Amazon, and the fact streaming has been incremental and not cannibalistic to their revenue streams. As a result, general, bulk-rate deals done a few years ago have been replaced with targeted exclusives.

“That bulk content didn’t really have that monetization alternative,” Wells said.

The CFO said it would take multiple original programs to realize net additions in monthly subscribers. He said they upcoming “Arrested Development” comedy reboot could push the needle due to its established rabid fan base and eccentric content.

“It might have an impact in Q2 … but it’s a bit of a wild card,” Wells said.

Wells admitted newer Netflix subscribers retain at a lower rate than long-time members, a statistic he attributed to the amount of content older subs stream on a monthly basis.

“As a consumer comes into the service, they are evaluating how much value they receive from [Netflix],” he said.



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