Netflix CFO: Streaming Offers Greater Opportunity than DVD-by-Mail

18 May, 2009 By: Erik Gruenwedel

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Netflix’s streaming service could help the online DVD rental pioneer double its 10 million subscribers to about 50% of the combined subs of HBO, Showtime and Cinemax, said CFO Barry McCarthy.

Speaking May 18 to a J.P. Morgan investor conference in Boston, McCarthy said the Los Gatos. Calif.-based company’s Watch Now streaming service could help it attain anywhere from 20 million to 40 million monthly subscribers.

“We think [offering streaming] will be a larger market opportunity than the DVD-by-mail business has been because it offers greater convenience,” he said. “How large it becomes depends on the value the value-proposition becomes, meaning the monthly price.”

With its streaming service offering about 16,000 largely catalog titles (compared to 100,000 DVD titles), McCarthy sounded irritated at what he characterized as “uninformed” press reports about the quality of Netflix streams, including a dearth of new-release titles.

The CFO said the majority of new-release content (day-and-date with DVD) is held by cable operators — a reality that prompted Netflix’s third-party license agreement with Starz.

“Whether the cost of acquiring those rights is economical for us turns entirely on our ability to grow our subscriber base,” McCarthy said. “If we do that well, I think there are attractive economics, and if we do it poorly, clearly there aren’t.”

He said that of the three available business models for electronic distribution — pay-per-view, ad-supported and subscription — only the latter appeared economically feasible to Netflix.

The CFO said cable and Internet pay-per-view have not been very successful and ad-supported channels such as Hulu generate scant incremental revenue.

“The big question around Apple and Amazon is not what are they going to do in the pay-per-view space, it is what are they going to do when they realize they are not being very successful,” McCarthy said. “And [theirs is] all new-release content. Something else is going on.”

He said the success of electronic distribution depends on the proliferation of Web-enabled devices in the home, including HDTV, Blu-ray players and set-top boxes.

McCarthy said he doesn’t view it as a question between new releases and catalog, but rather good content vs. bad content. The CFO said a superior user interface compared to the grid guide on cable coupled with the knowledge that 75% of Netflix DVD rentals are catalog underscored a strategy to pick and choose streams.

“Some of [the new] content is good and much of it is bad,” he said. “We really believe it is about good movies vs. not.”
 

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