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Netflix CFO Says Blu-ray to Have Limited Impact in 2008

15 Sep, 2008 By: Erik Gruenwedel

Netflix CFO Barry McCarthy Sept. 15 said the online DVD rental pioneer doesn’t anticipate a big impact by Blu-ray on its business or home entertainment this year.

Speaking at an investor conference in San Francisco, McCarthy said consumer adoption of the Blu-ray format thus far has been slow. He said consumer electronics hardware sales typically occur during the holidays, which he said might change the outlook.

McCarthy said he expected Blu-ray player price points would be at $399 this year, around $299 next year and $199 thereafter.

“It may grow after the holiday selling season, if sales are slow and prices are cut more aggressively,” he said.

Netflix previously disclosed that only a low signal-digit percentage of its subscribers rent the high-definition packaged media format.

He said ongoing retail pricing pressure has driven prices for Blu-ray movies down, which he said should spike consumer interest. The CFO said Netflix would continue to primarily ship discs over the next 10 years due to studio economics predicated on the consumption of DVD.

McCarthy said about 15% of Netflix’s subscribers were affected by last month’s distribution glitch that shuttered outbound shipments for 72 hours. He the negative impact was negated somewhat by the Beijing Summer Olympics in China.

“Fortunately for us it did happen during the Olympics, when consumers were busy consuming content on their TV set, rather than from us,” McCarthy said. “The effect on our brand could have been much worse.”

When compared to Amazon’s Unbox recent video-on-demand service with 40,000 titles, McCarthy said the value of Netflix’s unlimited streaming subscription model with 12,000 titles trumped the broader selection of content in an a-la-carte world.

He said Netflix in 1999 operated as an a-la-carte DVD rental business and came very close to going out of business.

He said recent partnerships with CE software and hardware manufacturers, including Microsoft Xbox Live, represent growth opportunities for streaming.

The CFO said streaming remained an extension — not replacement — of the DVD-by-mail service. He said higher streaming usage would result in lower gross margins and necessitate figuring out a price point that “helps consumers and helps us make money.”

“DVD plus streaming is always better than streaming a-la-carte or pay-per-view,” he said.

The CFO said the biggest threat in the future would be if cable pay-per-view adopted a subscription model.

“Then you have to be prepared to write some big checks,” McCarthy said. “And have lots of licensed content.”

McCarthy said Netflix had been careful not to disclose traction for its streaming service, a strategy it did not adhere to with online DVD rental.

He said Blockbuster got a hold of Netflix’s DVD traction, which he said led them to believe they could build a profitable model.

“They jump right on top of us,” McCarthy said. “If they hadn’t had access to those files, they would have waited longer and we could have done more open-field running than we were able to do. So we are going to say as little as possible about how well we are doing.”

Separately, Yahoo said it would allow Netflix, Apple and Amazon to put widgets onto its pages.

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