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Netflix Disc Sub Loss Slows

30 Oct, 2012 By: Erik Gruenwedel

Third quarter marked the third consecutive drop in departing disc subscribers

Netflix lost 634,000 disc subscribers in the third quarter (ended Sept. 30), which was 25% less than the 849,000 disc subs jettisoned during the second quarter (ended June 30), according to financial documents released Oct. 30.

Netflix, which continues to focus attention and resources marketing, supplying and distributing subscription video-on-demand, ended Q3 with 8.5 million disc subscribers. This tally also includes subs that pay for both physical and streaming.

In the first quarter (ended March 31), Netflix lost more than 1 million disc subscribers to finish the period with 10 million. That loss paled in comparison to the fourth quarter in 2011 when the Los Gatos, Calif.-based service lost 2.76 million disc subs after it implemented a 60% price hike in Q3 2011 for the popular hybrid disc/streaming rental plan.

Netflix compounded the public relations challenge when it haphazardly tried to spin off the disc business into the short-lived Qwikster platform – underscoring management’s indifference toward its pioneering by-mail disc rental service.

Indeed, Netflix in the current Q3 filing said marketing costs associated with disc rental were negligible, with disc expenses ($140 million) of the $271 million in physical rental revenue attributed largely to first-class postage, handling (distribution centers) and content acquisition.

Netflix said it does not expect future investments in DVD content, technology or marketing to be material. It said current and future expenses for disc rentals are variable. As a result, contribution margins for disc are expected to increase slightly for the remainder of the year despite ongoing subscriber declines.

By comparison, Netflix spent $635 million (on $634 million in revenue) on costs related to delivering streaming content to both domestic and international subscribers – a fiscal imbalance largely driven by foreign expansion.

“As a result of our focus on growing the streaming segments, contribution margins for the domestic and international streaming segments are lower than for our domestic DVD segment,” read the financial statement. “Also impacting the domestic streaming segment was the loss of subscribers resulting from the consumer reaction to the pricing and plan changes made in the third quarter of 2011.”

Meanwhile, Netflix will spend about $2 billion on content license fees in 2012, including a $171 million Q3 increase in acquisition and licensing expenses. The increase was primarily driven by a 26% spike in the domestic SVOD market. Additionally, launches in Latin America, the U.K. and Ireland contributed to a 14% rise in content expenses associated with international operations. The service has more than $5 billion in outstanding obligations regarding digital license fees.

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