Netflix’s Streams Up, DVDs Down


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, 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.