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Netflix to Boost Subscription Cost

15 Apr, 2004 By: Holly J. Wagner

Netflix will raise the base price of its three-out subscription from $19.95 to $21.99 a month beginning in mid-June, executives said today.

“Over the past four years, Netflix has created the premier online DVD rental service and transformed the home entertainment experience of nearly 2 million members,” said Neflix CEO Reed Hastings. “As we continue investments in this service, we are changing its price to reflect the robust offering we provide and the inherent value of that service.”

The No. 1 online rentailer is bracing to lose a few subscribers in its second quarter as a result, but funds from the higher cost will be used “for more content spending to improve the rental experience.” After a transition quarter, the price hike may let the company maintain 42 percent to 45 percent gross margins while investing in more in new releases.

“Our commitment to ongoing investments in service quality has steadily improved customer satisfaction and retention,” Hastings said. “At our new price, we will make the world's best movie service even better, and, as a result, we expect to reduce churn to below four percent in 2005.”

Total revenue for the first quarter was $100.4 million, up 24 percent from $81.2 million for the fourth quarter of 2003, and up 80 percent from $55.7 million for the first quarter of 2003.

Netflix ended the first quarter of 2004 with approximately 1,932,000 total subscribers, including 760,000 new trial subscribers. The company expects to break 2 million subscriptions by the end of the second quarter and near 3 million by year's end. Subscriber acquisition cost for the first quarter was $35.12 per new trial subscriber, compared to $31.67 for the first quarter of 2003, an expense the company expected as it increased television advertising.

Heading into the second quarter, Netflix expects revenue of $116 million to $120 million, gross margin of 40 percent to 42 percent, subscriber acquisition costs of $34 to $36 each, and a 4.9 percent to 5.9 percent churn rate.

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