Analyst Downplays Surge in Free Netflix Subs

28 Jan, 2011 By: Erik Gruenwedel

Critics looking to undermine Netflix’s latest fiscal halo are focusing on a surge in free subscribers to 8.7% of total membership in the most recent quarter (ended Dec. 31), compared with 3.1% a year ago.

With Netflix reporting 20.1 million subscribers at the end of the quarter, 1.74 million were non-paying, compared with 384,000 non-paying members during the same period a year ago, when it had 12.4 million subs.

Analyst Eric Wold with Merriman Capital in New York said the increase in free subscribers is primarily due to the Los Gatos, Calif.-based online disc rental pioneer extending to four weeks (from two) the free trial period, in addition to Netflix offering trial memberships with third-party consumer electronics devices – many of which were purchased over the winter holidays.

Netflix ended 2010 available on more than 200 CE devices.

The analyst contends the trial memberships are akin to retail gift cards, which retailers typically record as a fiscal liability on year-end balance sheets since they have received the funds without providing the service or product.

Indeed, Wold found a 93% conversion rate among Netflix trial memberships converting to paying subscribers over the past eight years since the service tracked free subs.

“As those free subscribers convert to paying subscribers in the first quarter, Netflix will experience a surge in revenues and margins,” Wold wrote in a note. “We believe Netflix has been extremely successful in converting free subscribers into paying subscribers during the next quarter, which was partially evident by the better-than-expected 1Q11 guidance provided Jan. 26 as most of those year-end free subscribers would have already converted.”