Netflix’s Streams Up, DVDs Down

Subscriber Growth Rebounds in Q4 After Price Change by Video-Rental Company

Todd Spangler -- Multichannel News, 1/30/2012 12:01:00 AM

After a customer backlash that caught it off guard, Netflix fared better than it expected on the Internet video front in the fourth quarter, adding 220,000 U.S. streaming-only subscribers — while it shed 2.76 million DVD-by-mail customers in the period.

In the fourth quarter, Netflix’s total unique U.S. subscribers increased 610,000, to 24.4 million total. At year-end, Netflix had 21.67 million streaming subs and 11.17 million DVD customers.

Still, the increase in U.S. streaming users was due to consumers who signed up for a free trial subscription in the last three months of 2011. Netflix actually lost a net 358,000 paid streaming subscribers in the U.S. in the fourth quarter, while those on free subscriptions jumped 62% sequentially to 1.52 million.

“We are encouraged by the strength in acquisition that we are seeing, coupled with continued improvements in retention among our domestic streaming members,” Netflix CEO Reed Hastings and chief financial officer David Wells wrote in a letter to shareholders.

Netflix shares jumped 22% last Thursday on the results, although analysts warned of looming competition, specifically from Amazon.com, which is expected to launch a standalone streaming-video subscription service this year.

Netflix split apart DVD and streaming plans last summer, a change aimed at migrating users to the higher-margin streaming-only platform. But that prompted a wave of customer outrage, and Netflix lost a net 800,000 U.S. subscribers in the September quarter.

While DVD cancellations in the fourth quarter subsided from peak levels in September, Netflix expects “continued attrition” on DVD plans, forecasting a net loss of approximately 1.5 million DVD subscribers in the current quarter.

Indeed, as Hastings said on the company’s earnings call last week, “We expect DVD subscribers to decline steadily every quarter forever.”

In the fourth quarter, streaming customers watched more than 2 billion hours of Netflix streaming video, or approximately 30 hours per member per month on average, according to the company.

Once again, the two Netfl ix executives downplayed the end of its deal with Starz Entertainment, which expires at the end of February.

“[W]e have plenty of substitutes and in many cases have already directly relicensed from the studios some of the top performing Encore titles,” Hastings and Wells wrote. “So, the only significant loss is the current 15 Disney output titles, such as Toy Story 3 and Tangled, which currently constitute about 2% of our domestic viewing.”

Netflix also is increasingly turning to exclusive content, such as Lilyhammer, an original series starring Steven Van Zandt of The Sopranos fame to debut Feb. 6. The company views its long-term competition as cable networks, chiefly HBO, which has the most fully developed TV Everywhere strategy to date.

“[W]e are just another network competing for viewing time with, and licensing content from, other networks,” Hastings and Wells said.

The company posted fourth-quarter revenue of $876 million (up 47% from the year-earlier period) and a net profit of $41 million — a year-over-year decline of 13%.

For the current quarter, Netflix projects that it will be in the red, with a net loss of between $9 million and $27 million; the company cited investment in international markets (particularly the U.K.). The company previously has said that it expects to post a net loss for full-year 2012.

Netflix said in the first quarter of 2012 to date, U.S. net additions for streaming are tracking close to its total net adds in Q1 2010 of 1.7 million. The company expects to end the first quarter with 22.8 million to 23.6 million streaming subs, and 9.4 million to 10 million DVD customers.

Separately, earlier this month Netf lix announced that Leslie Kilgore — its chief marketing officer for 12 years — will no longer serve as CMO but will join the company’s board as a non-executive director. The company appointed Jessie Becker, previously vice president of marketing, as interim CMO while it searches for a permanent replacement.