Netflix looks to download arena

As company revenue soars for Q4, year

By Jennifer Netherby -- Video Business, 1/27/2006

JAN. 27 | Netflix talked up its plans to enter the digital download arena without offering any detailed plans or timeframe during its fourth-quarter earnings call last week.

Netflix’s earnings soared to $38.1 million in the fourth quarter, a sixfold increase from a year earlier as the company grew its subscriber base by 60%, the company said.

Revenue was $195 million, up 36% from the previous fourth quarter.

Net income for the fiscal year doubled to $41.9 million. Revenue was up 36% to $688 million.

Netflix subscribers reached 4.2 million by the end of the year, surpassing the company’s target of 4 million subs. By the end of 2006, Netflix expects to have 5.9 million subscribers, but CEO Reed Hastings said that number should be considered the bottom range.

“Our strategy is to grow as fast as possible while delivering on our earnings targets,” Hastings said.

Subscriber acquisition costs rose to $40.65, up from $34.64 the previous year. Chief financial officer Barry McCarthy said the company would continue to spend as much as it can to acquire new subscribers while meeting earnings targets. He said Netflix wants to grow its business as quickly as possible to grow profits and be a significant player in the online download movie market when it decides to enter that arena.

Netflix believes the key to its growth for now is grabbing market share from bricks-and-mortar stores.

“You may think that [video-on-demand] or Blockbuster Online is our primary competition, but all of our research shows that local video stores remain the primary alternative to Netflix for consumers, and it’s clear that the local video store economic model continues to weaken,” Hastings said.

Hastings predicted that more video stores would close in 2006, which he believes will accelerate subscriber growth at Netflix.

Company execs downplayed the threat from VOD and shortened windows, saying VOD is too small a market to impact DVD rentals for the next couple years.

At the same time, Hastings stressed that Netflix intends to be at the forefront of digital downloads, investing $5 million to $10 million in technology for downloads this year.