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Netflix Subs Skyrocket 35%

21 Apr, 2010 By: Erik Gruenwedel

The juggernaut that is Netflix continued April 21 as the company reported nearly 14 million net subscribers at the end of the first quarter (ended March 31) — significantly topping analyst predictions.

The Los Gatos, Calif.-based online DVD rental pioneer posted quarterly net income of $32.3 million, up 44% from net income of $22.4 million during the prior-year period. Revenue approached $494 million, a 25% increase from revenue of $394 million a year earlier.

Net subscriber change (including non-renewals) in the quarter was an increase of 1,699,000 members compared to an increase of 920,000 for the same period last year, and an increase of 1,159,000 from the fourth quarter of 2009.

The company also reported the lowest subscriber acquisition cost ever at $21.54 per gross new subscriber, and churn at 3.8%. Churn represents subscribers who elect not to renew their monthly subscription service during the quarter.

Netflix said the percentage of subscribers who used Watched Instantly viewing more than 15 minutes of a TV episode or movie in the quarter was 55%, compared to 36% for the same period a year before and 48% for the fourth quarter of 2009.

Founder and CEO Reed Hastings said subscriber growth continues to be fueled by streaming, which members receive as a value-add depending on the type of monthly rental program they order.

“Our growth continued to accelerate in the first quarter, with record net subscriber additions and record-low subscriber acquisition cost,” Hastings said. “It is clear that our performance … is being driven by subscribers watching instantly. We see that has the key metric.”

Netflix does not disclose content costs related to streaming, but Hastings admitted the company was investing “generously” in digital fare.

He said the Apple iPad would have low impact on video viewing compared with the TV, video game systems, and Web-enabled Blu-ray Disc players.

“There is a very broad usage pattern with users accessing Netflix from multiple devices,” Hastings said.

When questioned about the impact the emerging retail window was having on Netflix subscribers, Hastings said he welcomed recent deals with Warner Home Video, Universal Studios Home Entertainment, 20th Century Fox Home Entertainment and HBO, despite the 28-day delay in new release shipments — a caveat competitor Blockbuster has underscored in marketing and some analysts have questioned.

“Our indication [on the impact of the delay] is our record low churn,” Hastings said. “The fact that pay-per-view, premium rental and DVD sales gain their own window doesn’t trouble us much. Our $9-per-month [rental plan] is very strong, and new release has always been a relatively small percentage of what we rent.”

The executive said Netflix continues to grow nationwide, including in the Salt Lake City area, which he said is Redbox’s most penetrated market.

Hastings said research showed that subscribers who leave Netflix are three times more likely to rent from kiosks than traditional video stores.

“In the long-term, kiosks and by-mail will be the majority of DVD rental,” Hastings said, joking that he would personally deliver the service’s perceived last disc rental in 2030.

“DVD has a lot of legs,” he said.

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