Netflix Predicts More of the Same For 2011, Including Stronger Competition

Netflix thinks that “many of the same forces at play in 2010” will continue into 2011, including video store closures and increased competition, CEO Reed Hastings said Wednesday with the release of the company’s Q3 results. The company also expects to see more devices that can receive streamed Netflix content, as well as “improved Netflix user interface, more Netflix streaming content” and “more awareness of streaming” in general, he said.

Devices that may get Netflix streaming soon include those using Google’s Android operating system, Hastings said on a Q-and-A conference call with analysts. Netflix is “working on Android now, and as soon as we have something to announce we'll announce that,” he said. Meanwhile, the percentage of Netflix subscribers who order Blu-ray discs was up from a year ago in Q3 ended Sept. 30, Hastings said. Blu-ray was “pretty flat in recent quarters,” but “still a nice little part of the business and it’s fine for us,” he said.

Netflix Q3 profit grew to $38 million, 70 cents per share, from $30.1 million, 52 cents, a year earlier as revenue jumped 31 percent to $553.2 million. It ended Q3 with about 16.9 million subscribers, up 52 percent year to year and up 13 percent from Q2 this year. Ninety-four percent are paying subscribers, it said. Q3 was the company’s “fourth consecutive quarter of more than 1 million net subscriber additions,” Hastings said.

The growth was “clearly driven by the strength of our streaming offering,” said Hastings. “By every measure, we are now primarily a streaming company that also offers DVD-by-mail.” In Q4, the company expects to “spend more on streaming content than DVD content” and will “deliver many more hours of entertainment via streaming than on DVD,” he said. Most subscribers will “watch more content streamed from Netflix than delivered by us on DVD” in Q4, he said. While “DVD-by-mail shipments are still growing,” streaming is “much larger and growing much faster,” he said. In the U.S. overall, DVD shipments are still growing about 10 percent year-over-year, and Netflix is spending more than $500 million a year on postage alone, he said. It’s much too soon to start closing DVD distribution centers, he said. “Over a sufficient number of years, as the volume” of disc shipments “comes down, like by 50 percent, there might be some small closures,” he said. But that’s probably many, many years out."

The introduction of the streaming service in Canada in late September gave the company “very encouraging signs regarding the potential for the Netflix service internationally,” Hastings said. The company is “not releasing subscriber count” for Canada, he said, but: “Our experience has been great in Canada. We've been hitting and exceeding all of our numbers and we're on track to be profitable in Canada late next year. So really just a super performance living up to our high expectations."

Netflix is “testing” subscription pricing “all the time,” said Chief Financial Officer Barry McCarthy. “The pricing in Canada is working well for us and maybe that will or will not play a role for us in the U.S. … As we continue to read test results, we'll continue to update our thinking about pricing."

Penetration of the Netflix streaming service has “been very strong with the Wii” among subscribers, Hastings said. “It’s a very popular device. It’s often connected to the living room TV. It’s more family-centric than the more hardcore gaming consoles and so it’s been a great platform for us.” He wouldn’t say how many Netflix subscribers were using the Wii or other specific devices for streaming. Asked whether Netflix is seeing an acceleration in subscribers streaming via game consoles now that a disc is a no longer required on the Wii and PS3 (CED Oct 19 p6, Oct 15 p6), Hastings said it’s too soon to tell. The disc requirement was “only lifted three-four days ago” on the Wii and PS3, “so we're just in the process of rolling that out,” he said. “We'll be able to comment more on that next quarter."

Netflix expects to have 19-19.7 million subscribers at the end of Q4, up from 17.7-18.5 million, it said. It still expects to report profit of $32 million-$40 million, 59-74 cents per share, for Q4. Revenue is expected to come in at $586 million-$598 million.