Netflix Expects Streaming Margins to Overtake Disc in Q1

29 Jan, 2013 By: Erik Gruenwedel

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Netflix Jan. 29 said it expects margins from its subscription video-on-demand service to overtake disc rentals in the first quarter, which ends March 31.

Netflix said its lucrative by-mail disc rental service would be negatively impacted a 2-cent first-class postage hike (based on round trip) by the U.S. Postal Service, compounded by a seasonal uptick in physical rentals in the period resulting in higher postage fees, according to a regulatory filing in conjunction with a previously-announced debt offering.

In 2012, Netflix’s domestic SVOD service generated a contribution margin of 16% compared with 47.3% for by-mail. In the fourth quarter, rentals of DVD and Blu-ray Disc titles accounted for more than 50% of Netflix operating income, or $128 million, while domestic streaming contributed a 18.5% margin and $109 million in operating income.

Domestic streaming contribution profit totaled $350 million in 2012, while domestic DVD contribution profit totaled $539 million.

“We expect contribution margins for the domestic DVD segment to decline sequentially due to a seasonal increase in usage in the first quarter of 2013 and the expected USPS rate increase of $0.01 each way, which takes effect in January 2013,” Netflix said.

As of Dec. 31, Netflix has more than $5.6 billion in streaming content license fee obligations, including $2.3 billion due in less than a year.

Separately, Netflix disclosed that chief content officer Ted Sarandos Jan. 25 exercised options on 44,000 shares, netting more than $3.3 million.

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