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Netflix Scuttles Proposed Download Service

20 Oct, 2005 By: Erik Gruenwedel

Netflix has halted plans to offer movie downloads to subscribers this year. Citing license agreement issues with the studios, Reed Hastings, CEO of the Los Gatos, Calif.-based online rental pioneer, told analysts during a quarterly conference call the company would revisit the concept when “the content climate begins to thaw.”

In February, Netflix CFO Barry McCarthy said the company was spending from 1 percent to 2 percent of revenue developing a download technology it hoped to partner with TV set-top box manufacturers.

Hastings said TV and select cable networks have tied up multi-year exclusive rights to studio product, thereby depriving movies for download services, including Apple Computer's new video iPod.

“You might think of Comcast, Movielink and Apple as our potential competitors, they are for now our allies,” Hastings said. “We all want broad, non-exclusive licensing of movies.”

Touting a 61 percent increase in subscribers and an all-time low churn rate, Netflix posted record third quarter (ended Sept. 30) revenue of $174.3 million, up 24 percent, from $140.4 million, during the same period last year.

Net income for the Los Gatos, Calif.-based service fell 63 percent to $6.9 million, or 11 cents per diluted share, compared to $18.9 million, or 29 cents per share last year.

Netflix ended the quarter with almost 3.5 million subscribers compared to 2.2 million during the same period last year. Subscriber acquisition costs (SAC) — a barometer of marketing efficiency — dropped 4 percent to $35.69. The churn rate, or free and paying subscribers who elect not to renew during the quarter, dropped to 4.3 percent from 5.7 percent last year.

Hastings said last year's subscription price cuts during the fourth quarter would result a more challenging comparable period this year. Netflix plans to incorporate several pricing tests over the next six months to determine whether it can drive subscriber growth and can lower SAC.

“If there is enough elasticity to make price cuts work, this would increase the economic pressure on video stores,” said Hastings. “The additional store closures would further [our] growth for many years. The positive feedback loop between Netflix growth and video store closings is the tipping point for online rentals.”

That said, Netflix revised upwards to 4.2 million from 4.05 million the number of total subscribers at the end of the fourth quarter. Revenue is projected to top $196 million from $193 previously, while net income is expected to reach $7.5 million from $6 million.

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