Netflix now No. 2 video subscription service, earnings impress Wall Street again


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No wonder Hollywood’s getting antsy.

Netflix Inc. reported strong subscriber and revenue growth in the fourth quarter of 2010, driving past its own predictions and Wall Street expectations and sending its already sky-high stock up 8% in after-hours trading.

The DVD-by-mail and online video company surpassed 20 million subscribers at the end of the year, making it the No. 2 video subscription company in the country, behind only cable giant Comcast Corp. Based on current trends, it should surpass Comcast by mid-2011.


Despite concerns that Netflix’s rapid growth rate might slow, its revenue increased by 34% to $596 million. The company added 3.08 million subscribers in the quarter, the first time ever it has added more than 2 million in a quarter.

Net income rose 52% to $47 million.

Netflix has been a hot topic of debate in the entertainment industry of late. Executives have questioned whether they are being compensated fairly for the use of their content on its Internet streaming service, which is increasingly seen as a competitor to cable as televisions connect to the Internet. Time Warner Chief Executive Jeff Bewkes, whose HBO pay cable network is increasingly seen as threatened by Netflix, has been a particularly vocal critic, publicly stating that Netflix’s business model is unsustainable.

The Silicon Valley company is up for the challenges. Chief Content Officer Ted Sarandos recently said at an industry conference that Netflix would be an “aggressive bidder” for movies from HBO’s sibling movie studio Warner Bros. when its contract with the pay cable network expires.

In a letter to investors from Chief Executive Reed Hastings and Chief Financial Officer David Wells that accompanied Wednesday’s financial results, the duo directly addressed the growing litany of complaints from media companies.

“[S]ome consternation about Netflix[‘s] success is natural,” the letter said. “Like the rise of the Fox network 20 years ago, a new entrant bids up the price of content and the incumbent aggregators are not pleased. Netflix is good for consumers, good for content producers, and is one more competitor for existing aggregators.”

Netflix currently licenses content for its streaming service from a number of movie studios and television networks both directly and indirectly via the pay cable channels Starz and Epix.


The five-year Epix deal, which brings Netflix movies from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer, began last September and is worth about $1 billion.

Netflix’s deal with Starz, which gives it movies from Sony Pictures and Walt Disney Studios, expires in the winter of 2012. The two companies are already talking about a renewal, which is expected to substantially raise Netflix’s costs.

Online streaming is becoming an increasingly important part of Netlix’s business and the company is encouraging subscribers to use it more and order DVDs via mail less. It recently launched a streaming-only plan for $8 per month while raising the rates for plans that include DVDs.

Hastings and Wells said nearly all new subscribers are signing up for that plan or one that offers streaming plus one DVD at a time for $10 per month.

As a result, however, the average revenue per user fell from $13.04 at the end of 2009 to $11.13 at the end of 2010.

The company said it will soon give users the option to allow family members to stream content on different devices simultaneously, presumably for a higher price.

Beyond lowering costs and adding tech-savvy users by shifting from DVDs to the Internet, Netflix is also looking to expand outside the U.S. The company launched Internet streaming in Canada in September and expects to be profitable there by the third quarter of this year. Hastings and Wells said Netflix could expand to a second foreign country as early as later this year.

Netflix stock closed down 2% at $183.03 before financial results were released Wednesday, then spiked to $197 after hours.

-- Ben Fritz


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