Jan 30, 2009

Business - Streaming Energizes Growth at Netflix

Mark Long

Confounding its own outlook for slowing growth in the fourth quarter, Netflix said its subscriber base grew by a robust 26 percent year over year to about 9,390,000 subscribers at the close of 2008.

"In hindsight, we underestimated the positive impact of the introduction of the multifunction consumer electronics devices from LG Electronics, Samsung, Microsoft and TiVo that promote Netflix streaming," said Reed Hastings, Netflix cofounder and CEO. "The precise impact of the recession is unclear, but it is very clear that streaming is energizing our growth."

Increased Investments

Netflix substantially increased its investment in streaming content over the Internet during the fourth quarter and plans to do the same this year. "Most of our streaming content spending is directly with TV networks and studios," Hastings told investors. "We now have over 12,000 movie and TV choices, up from 2,000 two years ago, and we are already one of the studios' largest revenue sources."

Netflix is also beefing up its content-streaming capabilities on the hardware side. Earlier this month, the company expanded its partnership agreement with LG Electronics and inked a new agreement with HDTV vendor Vizio.

LG Electronics has agreed to embed Netflix streaming software directly into its new line of broadband-enabled HDTVs, eliminating the need for an external device. Additionally, Vizio's new deal with Netflix means consumers will be able to stream high-definition video content from Netflix to TV sets based on Vizio's new Connected HDTV platform, which will begin shipping nationwide later this year.

Hastings told investors he fully supports Roku's recent decision to add functionality to its Netflix-enabled set-top box that would enable consumers to stream pay-per-view content from Amazon.com. Hastings said any increased competition would mostly be indirect because it would come in the form of "big new releases," which Netflix does not offer as part of its streaming subscription service. The upside is that Amazon will also be promoting streaming devices, "which provides us with more households to stream our service to," he explained.

Yankee Group analyst Josh Martin agrees. Adding utility to the box "increases the value proposition for consumers, and I don't think it hurts Netflix," Martin said.

Mail Delivery

About 700,000 of the company's subscribers were renting Blu-ray disks from Netflix at the end of the fourth quarter. "Adoption is growing nicely," Hastings said. "We expect our DVD and Blu-ray shipments to continue to grow in 2009 as they did in 2008."

Hastings also told investors that Netflix plans to expand its mail-delivery program this year. "This quarter, we will begin testing weekend shipping in parts of the country, which will provide even faster service."

However, U.S. Postmaster General John E. Potter told Congress Wednesday that the recession has caused the postal service to lose so much money that he sees the need for cutting mail deliveries from six days a week to five. "I do not make this request lightly, but I am forced to consider every option, given the severity of our challenge on Saturdays," Potter told members of a Senate subcommittee, according to The Washington Post.

Martin said he does not think Netflix would be hurt "in any significant way" by a mail-delivery cutback, should one materialize.

"This is one of the areas in which digital distribution will really help," Martin explained. "And any cut is so far away from passage that I don't think consumers should be too concerned."

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