Netflix guns for bricks-and-mortar
Ups subscriber projection to 6 million in 2006
By Jennifer Netherby -- Video Business, 9/9/2005
SEPT. 9 | Still battling Blockbuster for online subscribers, Netflix is setting its sights on its next biggest rival: video rental stores.
Netflix CEO Reed Hastings told analysts Thursday that Blockbuster’s troubling financial outlook last month marks the tipping point that will shift the rental market from stores to online services. With that in mind, Hastings said Netflix now expects to have 20 million subscribers in the next five to seven years, with year-over-year earnings growth of 50% for the next several years.
“The tipping point has not only started, it is gaining momentum,” Hastings said.
He recalled a prediction by Blockbuster chairman-CEO John Antioco last month that thousands of rental stores would close in the coming years.
“The tipping point is gaining velocity,” Hastings said. “That is what’s giving us confidence about reaching 20 million subscribers.”
Hastings and other top Netflix execs gave a broad outlook for Netflix during the company’s second annual Analyst Day. The company invited more than 80 analysts to attend the event at its Los Gatos, Calif., headquarters and Webcast the proceedings.
Netflix said it expects to report a $7 million profit this year, and Hastings said the company is on target for earnings of $50 million and 6 million subscribers in 2006. That would mean the company’s hitting that subscriber target a year earlier than previously projected.
Netflix expects to close out the third quarter of this year with between 3.35 million and 3.5 million subscribers.
Execs also said it’s possible that online rentals could reach 30% penetration of U.S. households, surpassing beyond previous expectations of reaching 20%. Chief marketing officer Leslie Kilgore said the bullish forecast is based in part on particularly strong growth in San Francisco’s Bay Area.
As penetration increases, Netflix officials claim it will mean lower subscriber acquisition costs. The company’s new subscribers are heavily driven by word-of-mouth advertising, they noted.
Kilgore said roughly 85% of new subscribers had been told about Netflix by someone they know, though that wasn’t the only factor that led them to join the service.
In the Bay Area, subscriber acquisition costs are between $25 and $30, below the national average of $37.62.
Chief content officer Ted Sarandos questioned whether Blockbuster will be able to easily ship rentals from its stores for its online service, something that has been seen as a major cost advantage the rental giant has over Netflix. Sarandos said that under revenue-sharing agreements the studios won’t allow rental inventory for online customers to be mixed with rental product for store customers.
Blockbuster is believed to have increased its inventory bought through revenue-sharing deals to 70% in the second quarter, up from 50% in previous quarters (VB, 9-2).
Netflix is continuing to work on a movie download service, which it plans to launch later this year.
Still, the company believes movie downloads will be a small market in the immediate future. Netflix is working with TiVo to explore delivery options and has begun to add download licenses into its deals.
Netflix’s stock was up 6.6% Thursday to close at $24.09.
Netflix’s news sent shares today of Blockbuster to an all-time low of $6.02 and Movie Gallery shares were off 7%.
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