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Netflix Plans Downloads by End of 2005

27 Jan, 2005 By: Holly J. Wagner

Netflix will begin delivering movies over the Internet by the end of the year, even though executives believe there will be little demand for it in the near term because of limited content offerings.

“We expect DVD, both standard DVD and high-def, to have an exclusive window through at least this decade,” CEO Reed Hastings said, but Netflix will add a download option to keep its lead in online rentals.

Netflix ended 2004 with 2.6 million subscribers, Hastings said, and plans to add another 200,000 or more in the first quarter of this year. The company expects to lose money for the quarter, but Hastings said he is determined not to in the remaining three quarters of 2005.

The launch of Blockbuster Online was more aggressive than Netflix executives anticipated, but Hastings said it is growing the online rental market for all players.

“In two quarters since Blockbuster Online launched, we have added 517,000 customers,” he said. “Our primary goal for 2005 is to reach 4 million subscribers. This large and growing market appears to have room for multiple players…but we have more overnight delivery and higher availability than any competitor.”

The online rental price war that launched when Netflix dropped its price to $17.99 a month will hurt others more than Netflix, Hastings said. Blockbuster Online dropped its price to $14.99 a month, but Netflix CFO Barry McCarthy estimated subscriber acquisition costs, which are $34 per customer for Netflix, at about $50 per customer for Blockbuster, mainly because of the TV and radio ads Blockbuster has been running to promote its new initiatives.

“We expect them to lose money on every customer unless they cut down on their marketing spending, which would slow their growth,” McCarthy said.

Hastings said Netflix will keep its $17.99 subscription price for the foreseeable future, but would evaluate and possibly respond to future price cuts from competitors.

“We believe we have the highest growth margin and the lowest costs of any competitor in our market,” Hastings said.

“We do not intend to lose our leadership position. It is too valuable for the market now and for the market for Internet delivery.”

Netflix finished 2004 with revenue of $143.9 million for the fourth quarter and $506.2 million for the year.

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