Netflix delays movie downloads

Reports profit drop but rise in revenue, subs

By Jennifer Netherby -- Video Business, 10/19/2005

OCT. 19 | Netflix CEO Reed Hastings said the company is pulling back plans to launch an Internet movie download service this year, because there isn’t enough movie content available.

Hastings said exclusive agreements with pay TV outlets that limit the number of movies available for download online is the biggest obstacle to download services—something Apple, Movielink and CinemaNow are already experiencing. Work has stopped on the company’s plans with TiVo for some sort of download partnership because of the lack of content, he said.

“When the content climate does shift, we will have broad content for downloading,” the Netflix chief said. “Whether this happens in two quarters or 20 quarters is hard to say. In the near term, DVD is king.”

The comments were made Wednesday afternoon in a conference call with analysts to discuss the company’s third-quarter earnings. And though Blockbuster recently warned of slowed subscriber growth, Netflix reported a 61% increase in subscriptions during the quarter ended Sept. 30.

Netflix now has 3.6 million members, after adding 396,000 subs in the quarter.

Despite that, Netflix earnings dropped 62% to $6.9 million due in part to litigation costs, which the company warned about in late September, and to increased marketing expenses.

Quarterly revenue rose 23% to $174.3 million.

Hastings said Netflix will test new, lower price points over the next six months to see if it will put more pressure on bricks-and-mortar video stores. And he reiterated a claim that the company is nearing a market tipping point, at which consumers will begin switching to online rental services in larger numbers.

Despite increased marketing costs during the quarter, Netflix managed to cut down on the cost to add new subscribers. Subscriber acquisition costs were $35.69, down from $36.97 the previous third quarter and $37.25 during the second quarter of this year.

The company said churn—the rate of subscribers leaving the service—slid to a record low 4.3% during the quarter, which it attributes to lower subscription prices.

The company’s margins also were helped by weaker competition and an aging subscriber base, which rents fewer movies, and a move to lower-priced plans, on which the company earns higher margins.

Netflix raised its expectations for the year. The company now expects to close with between 4 million and 4.2 million subscribers, with net income between $4 million and $7.5 million. The company previously targeted a range of 3.85 million and 4 million subscribers and net income between $1 million and $6 million.

In 2006, Netflix expects to grow to 5.65 million subscribers with pretax net income between $50 million and $60 million.

Netflix’ stock slipped 4.7% in after-hours trading Wednesday to $27.