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Reed Hastings: DVD ‘Sales Only’ Window Could Benefit Netflix

22 Oct, 2009 By: Erik Gruenwedel

Netflix co-founder and CEO Reed Hastings said the company is open to allowing studios to sell new-release titles prior to rental, provided the economics make sense.

Speaking to investors on a financial results call, Hastings said if studios chose to support a sales-only window and delay rental, it would likely shrink the rental market and would grow sales revenue for those studios.

“If we can agree on low enough pricing for delayed rental, it could potentially increase profits for everyone,” Hastings said.

He said a short DVD sales window would be a benefit to disc sales and, therefore, to the health of the whole DVD ecosystem. Hastings said it also would allow Netflix to spend less on discs and more on streaming content.

“Because we are less dependent on new releases than our DVD-based competitors, we may be in the position to move to this model earlier than our competitors,” he said.   

The CEO said he believed such a policy could end the rift and litigation between studios and kiosk operators regarding $1-per-day rentals.

Hastings said the company would spend $40 million over the next 18 months investing in new automated rental return machines in an effort to stay abreast of burgeoning disc shipments.

He said Netflix would spend $600 million in 2009 on postal fees shipping and receiving discs, increasing to $700 million in 2010.

“Netflix is on track for a record year in 2009,” co-founder and CEO Reed Hastings said in a call with investors. “We feel blessed to be growing at these enormous rates.”

“We expect to rent DVDs to 2030,” Hastings said, adding that 9.6% of U.S. households now use the service.

Netflix said it would add an additional 900,000 to 1.2 million subscribers in the fourth quarter, greatly exceeding previous projections.

“We expect to grow faster than street estimates,” said CFO Barry McCarthy.

Netflix ended the third quarter (ended Sept. 30) with about 11.1 million subscribers, which represented a 28% increase from a membership base of 8.7 million last year. Net subscriber increase (less non-renewals) totaled 510,000, compared to an increase of 261,000 subs last year.

More importantly the cost to acquire a new subscriber (SAC) decreased nearly 17% to $26.66 from $32.21 for the same period in 2008.

For the first time, Netflix disclosed the percentage of subscribers using its Watch Instantly streaming service. In the third quarter, 42% of subscribers streamed at least 15 minutes of a TV show or movie, nearly twice the number of subscribers who did so during the same period last year.

By comparison nearly every subscriber rented at least one DVD during the quarter.

“It is a good marker of increased streaming adoption,” Hastings said. “We don’t see watching one TV show or one movie in the quarter as sufficient, but it is a good start.”

He said streaming eventually will allow Netflix to become one of the studios’ and TV networks’ biggest partners.

Netflix’s movie-streaming service received a boost when Best Buy said it would include the feature in two of its Insignia brand Blu-ray Disc players.

The technology enables Netflix members to watch movies and TV episodes streamed from Netflix over the Internet to their digital televisions.

The Insignia Advanced Series Blu-ray player (NS-WBRDVD) and the Insignia Connected Blu-ray player (NS-BRDVD3) are priced at $249.99 and $179.99, respectively. The Insignia Advanced Series model uses built-in Wi-Fi to connect to the Internet while the Insignia Connected player uses an Ethernet connection.

“The ability to instantly watch movies streaming from Netflix via the Insignia line of Blu-ray Disc players will appeal to Best Buy shoppers who seek unsurpassed convenience, selection and value in a Blu-ray disc player,” said Nigel Waites, CTO of Best Buy’s Exclusive Brands.

Netflix has similar deals with Samsung, Roku, TiVo and Microsoft Xbox 360, in addition to Sony, Vizio and LG Electronics Web-enabled TVs.

Independent analyst Rob Enderle said the association with Best Buy represented an insurance of sorts against the rival online movie streaming service from Amazon, which he considered Netflix’s biggest long-term competitive risk.

“By getting Best Buy, they hedge well against this future competitor and continue to showcase why they are the leader in the movie-subscription space (and intend to remain that way),” Enderle said.  

Richard Doherty, director of The Envisioneering Group in Seaford, N.Y., characterized the partnership as “huge,” due to Best Buy’s leadership in consumer adoption of Blu-ray Disc hardware and software.

“By becoming the first major retailer to add the nation’s most popular movie streaming service, Best Buy stands a great chance of boosting the number of households who can afford Netflix and Netflix HD content,” Doherty said.

Edward Woo, analyst with Wedbush Morgan Securities, said the Best Buy deal is another positive step for the online DVD rental pioneer’s stated goal to incorporate the streaming technology in 100 CE devices.

While Woo applauded the Best Buy association, he said the CE retailer’s house brands are not as popular as other brands, and typically cater to a more price conscience crowd that may not want to subscribe to Netflix.

“A much bigger deal would be to get Watch Instantly on another video game platform,” he said.

Hastings confirmed industry chatter Netflix in the fourth quarter will announce a partnership with a major CE firm that has a “material install” base. He said the company also would initiate offering streaming abroad by the middle of 2010.

The anticipated follow-up to distributing movie streams via Microsoft’s Xbox 360 Live most likely will be with the Sony PlayStation 3 system, according to analyst Michael Pachter with Wedbush Morgan Securities in Los Angles. However, Pachter said partnering with Nintendo would create a much larger potential audience.

Netflix once again defied recessionary woes affecting most retailers as it posted impressive surges in third-quarter (ended Sept. 30) profit, revenue and subscriber growth.

The Los Gatos, Calif.-based online DVD rental pioneer reported net income of $30.1 million, up nearly 48% from net income of $20.4 million during the previous year period.

Revenue for the period topped $423 million, up 24% from revenue of more than $341 million last year.

Churn, which includes free and paying subscribers who elect not to renew, was 4.4%, compared to 4.2% last year.

General and administrative costs, excluding technology and development (i.e. Watch Instantly steaming), declined to $11.5 million from $11.7 million last year.

Gross margin improved 0.7% to 34.9% from 34.2% last year.


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