Netflix CFO: Blockbuster Total Access 'An Illogical Act'23 May, 2007 By: Erik Gruenwedel
Declaring Blockbuster's Total Access online movie rental, in-store return service a fiscal disaster, Netflix CFO Barry McCarthy told investors the online movie rental pioneer's subscriber growth would continue to slow until Big Blue raised its prices.
He said previous subscriber-growth projections to 20 million by 2012 would not be met without at least a $2 monthly price increase by Blockbuster.
“They have a very aggressive price point, which we project they lose money on with every subscriber,” McCarthy told analysts at a Goldman Sachs conference in Las Vegas.
McCarthy estimated Blockbuster would lose $350 million through 2008 on Total Access, whose business model he said is predicated on cannibalizing from the service's in-store customer base.
“If they continue down that path, [it] seems like an irrational act,” he said.
The CFO said should Netflix drop its rental prices to compete against Total Access, it would lose $200 million.
McCarthy said the online movie rental industry would then mirror satellite radio, where he said XM Radio and Sirius remain locked in a self-destructive, money-losing battle with acquisition costs flying through the roof as “they beat on each other” for market share.
“Once you are locked in a battle for market share and you both are oozing money, how do you march the price back up?” McCarthy said.
The CFO was asked about Netflix's pending streaming business and how he envisioned the electronic sellthrough market panning out.
“Who knows how widespread this [download] business is going to be,” McCarthy said. “The only thing we can say with certainty is that it will be a long time in coming.”
He said Internet delivered content to the PC represented a limited market opportunity, while ad-supported content might help pay studio licensing fees for a feature film.
The executive said much of Netflix's $40 million budget for its streaming service involved license fees in addition to encoding, hardware and software-related costs.
“You need a device to get the content to the TV, and that device is not going to be the PC as the market unfolds,” McCarthy said. “It will be a freestanding device. Which is why I think a pay-as-you-go service will succeed.”
The CFO wouldn't elaborate on a possible set-top box, which he said wouldn't materialize, if at all, until next year.
“There is no nirvana open standard set-top box consumers could buy that is going to drive adoption,” McCarthy said. “It is going to be more of a drip, drip, drip kind of phenomenon.”
The CFO also discounted competing with cable operators for studio content, “unless you are willing to write a billion dollar check” when studio contracts are up for renewal.
“We don't have the appetite or the balance sheet for that type of business,” he said.
He questioned whether HBO and Showtime would continue to pay a premium to studios for exclusivity. He said the argument against renewing was based on the fact half the audience for first-run movies had declined due to DVD sellthrough.