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Netflix Eyes 500K Blu-ray Subscribers in Q4

20 Oct, 2008 By: Erik Gruenwedel

Netflix said it expects about 500,000 of its nearly 8.7 million subscribers to be Blu-ray Disc subscribers by the end of the year.

The Los Gatos, Calif.-based online DVD rental pioneer would generate about $6 million annually from Blu-ray subs when factoring the recently announced $1 monthly surcharge to Blu-ray subscribers, which takes effect Nov. 5.

“This number will grow over time as Blu-ray player prices fall,” said Reed Hastings, co-founder and CEO, in a call with investors.

He said the overall impact of the high-definition packaged-media format remains a work in progress as Blu-ray usage continues to be a small percentage of the subscriber base.

“We believe it will still be a relatively small come year end,” Hastings said.

Netflix reported third-quarter (ended Sept. 30) net income of $20.4 million, compared to income of $15.7 million during the prior-year period. Revenue increased 16% to $341 million, compared to $294 million last year.

The rental service said it realized 261,000 net new subscribers, down 9% from an increase of 286,000 net subs last year.

“That’s disappointing news,” said CFO Barry McCarthy.

Total subs exceeded 8.67 million and projections for the end of the year range from 8.85 million to 9.15 million.

Netflix, which previously projected 9.7 million subs by the end of 2008, cited the “markedly deteriorated” economy for the reduced subs. Hastings said subscriber growth in the current quarter was down 30% from last year.

“The current economic recession means continued subscriber growth for Netflix, but not as fast as last year,” he said.

Hastings said earnings going forward would primarily come from existing subscribers versus new subscribers, which he said bodes well given the current economic climate.

“This is the real power of the subscription model,” Hastings said.

Churn, the rate of subscribers not renewing, remained the same (4.2%) as last year. Netflix had expected a slightly lower churn rate due to the age of its subscriber base, according to CFO Barry McCarthy.

He said the state of the economy might explain the “modest headwind” experienced with churn in Q3 and what is expected in the fourth quarter.

“We have not, and we are not, seeing increased levels of DVD usage as consumers trim discretionary spending outside the home in response to economic pressures,” McCarthy said.

Subscriber acquisition costs increased to $32.21 per gross subscriber from $28.89 in the second quarter — the first sequential increase in six quarters.

“SAC did decline 15% from the same period last year, which means our economic model remains healthy,” McCarthy said.

Hastings said Microsoft next month would issue a software upgrade to Xbox 360 users, which includes Netflix’s streaming service. Access to the streaming requires an Internet connection and membership to Xbox Live Gold ($50 annually).

The CEO said consumer interest in laptop streaming was increasing and that the company would continue to invest in it as it has with TV-based streaming.
He called the recent distribution agreement with Starz “very significant,” saying it circumvents a fragmented streaming distribution channel and accelerates dissemination of entertainment to the TV via the Internet.

He said all costs associated with the Starz deal are factored into the streaming budget.

When asked whether streaming consumers would negatively affect DVD rentals, Hastings said the typical streaming consumer differed from typical DVD subscriber, so comparing the two wouldn’t make sense.

“There is no good control of what those people would have done,” he said. “Our value-add is in our Web site, on-demand streaming and linking with DVD distribution.”


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