Netflix Builds On Streaming Online Video

by Anthony John Agnello | October 21, 2010 2:22 pm

Netflix Builds On Streaming Online Video

Netflix  (NASDAQ: NFLX[1]) continues to have a strong year. While other video entertainment sectors are hurting, particularly DVD sales, the online and by-mail movie rental service has seen consistent growth and strong revenue throughout the year. Riding high on its third-quarter earnings report this week, Netflix has begun the process of redefining its brand as its service shifts away from disc-based DVD and Blu-ray rentals towards on demand streaming over the Internet through a variety of consumer electronics.

During its third-quarter earnings call, Netflix executives described the company for the first time as “a streaming company, which also offers DVD by mail.” The description fits the service well. Last month, Netflix debuted its service in Canada, but unlike its previous incarnations, Netflix Canada provides streaming online service only, no DVD rentals by mail. Now, according to a report in the Los Angeles Times, Netflix is coming home and bringing its online-only subscriptions to the United States.

CEO Reed Hastings announced during the company’s third-quarter earnings call that Netflix has begun testing an online streaming-only subscription model in the U.S. Just like the streaming subscriptions in Canada, the test subscriptions in the U.S. cost $7.99 per month, just $1 less than the lowest tier of its current subscription model that lets users receive one DVD rental by mail. Hastings emphasized that Netflix wouldn’t stop offering disc-based rentals if the online-only tests proved successful, but he did reveal that his company is pouring more and more of its resources into its streaming business. Netflix recently signed a five-year, $1 billion deal with premium cable network Epix, the joint venture owned by Viacom’s (NYSE: VIA[2]) Paramount Pictures, Lions Gate Entertainment (NYSE: LGF[3]), and Metro-Goldwyn-Mayer (currently in negotiations to be purchased by LGF.) Thos companies will be providing hours of content exclusively for Netflix’s streaming service, tipping the scales from DVD to instant streaming in terms of which Netflix branch offers the most to audiences.

Switching to a purely streaming business model is risky for Netflix, as the lower-tier subscription models equate to less revenue per customer. Average monthly revenue per subscriber dropped 9% year-on-year in Netflix’s third quarter, down to $12.12 per customer. Of course, the Los Gatos, Calif. company also added 1.93 million subscribers to its current stable, bringing its total subscribers to 16.9 million.

Yesterday, Netflix said  it earned $38 million, or 70 cents per share, in the third quarter, compared with $30.1 million, or 52 cents per share, in last year’s third quarter. Third-quarter revenue rose 31% to $553.2 million compared with the year-earlier period. Netflix shares are up more than 10% today, trading around $171 per share.

Netflix is leading the shift from disc-based and broadcast video entertainment to online-only, streaming on-demand services. Subscribers access Netflix’s content through almost every consumer electronics device available, from Apple’s (NASDAQ: AAPL[4]) iPhone to Microsoft’s (NASDAQ: MSFT) Xbox 360 to both Google’s (NASDAQ: GOOG) Android smartphones and new Google TV set-top boxes. With projections for Netflix’s year-end subscriber base jumping from 18.5 million users to 19.7 million following the company’s earnings, investors who haven’t bought in yet should follow the stock over the next month. Look for a dip back to the $150 per share range and expect a significant return when Netflix reports its fourth quarter results in early 2011.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.

Endnotes:
  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. VIA: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIA
  3. LGF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LGF
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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