40 Percent of Netflix Streaming Subscribers Also Have DVD Subs

Pay-per-view TV is not on Netflix’s radar screen, CEO Reed Hastings said on an earnings call. “It would confuse the brand,” Hastings said, saying the company has built a “precise” model on $7.99 a month subscriptions, and that the market is well-stocked with other pay-per-view models from Amazon, Blockbuster, iTunes and more. He compared Netflix’s strategy with that of Dolby Digital -- “to be in every platform and get along with everyone.” The market is large enough at an $8 monthly subscription rate “to have us grow very large,” he said.

Following the splitting of its video rental business into DVD and streaming services last year, Netflix added roughly 1.9 million paid streaming subscriptions sequentially in Q1, the company said, but paid DVD subscriptions dropped by 1.08 million to 9.96 million. Streaming customers have a higher churn rate than DVD subscribers, Hastings said, because “we make it easy for subscribers to get in and get out.” The top two reasons subscribers cited for ending subscriptions, executives said, were “not watching enough” video and “having no money."

At the end of 2011, 8.4 million subscribers had both Netflix services, which represented about 40 percent of total streaming subscribers domestically, said Ellie Mertz, vice president of finance and investor relations. The number of hybrid subscribers is continuing to fall, and the company expects DVD subscribers to decline “steadily every quarter forever,” Hastings said.

On issues affecting the DVD market, Hastings said the projected closing of post offices -- and the ability to continue shipping discs smoothly -- probably won’t take place this year because of the election so the company won’t see residual effects. Regarding potential shutting of distribution centers, he said Netflix sees “no practical savings” to closing them. Most of the costs of the DVD model are the discs and postage, he said, and not the processing centers.

Regarding Warner’s decision to double the new-release window to 56 days and the impact that might have on DVD subscribers, Chief Financial Officer David Wells said it will likely be very little because most hybrid and DVD-only customers are weighted toward catalog rentals. Fewer than 30 percent of DVD shipments are new releases, he said. To broaden the menu, Netflix has added “a lot of Blu-ray that’s 3D,” Hastings said, and the company is exploring streaming movies in 3D, too. Netflix has no plans to enter video games as a category, he said.

Despite the drop in DVD subscriptions and costs, Netflix’ goal is to keep that business “stable,” and “running very well” to maintain queue fulfillment and one-day turnaround, Hastings said. At the same time, the company isn’t looking to spend on gaining new customers, Wells said. When Netflix tested DVD plans with consumers, “there hasn’t been a great take rate,” he said.

As for streaming side, Netflix doesn’t currently see competitors bidding more aggressively for content rights on par with those of Netflix, Hastings said. Hulu Plus and Amazon are “quite small bidders” compared with the cable networks Netflix bids against, he said. Regarding the possibility of Amazon getting into the stand-alone subscription market at a lower price than Netflix, Hastings said he’s not sure about Amazon’s content strategy. “It depends on how much they want to spend."

Netflix plans to hold its $7.99 monthly rate for streaming subscriptions but is looking at multi-account options over the year that are aimed at providing a more fine-tuned experience for families, for instance. Under that model, “not all of your kids’ content shows up for you, and not all of your content shows up on your kids’ accounts,” Hastings said.

Hastings held firm on his belief that tablets, while “very successful,” aren’t a subscriber acquisition channel for Netflix, regardless of how out-of-home bandwidth speeds advance. “People are watching Netflix on lots of tablets,” he said, but a tablet is a “consumption vehicle,” not an “acquisition vehicle,” he said. Tablets are a key part of the Netflix strategy, and it recently updated its iPad interface, he said. Wells said the investment in tablets is a response to people doing more viewing on tablets “relative to the PC."

Smart TV is in the early stages but is one of the fastest growing device categories for Netflix, Hastings said. On TVs with a red Netflix button, “it makes it very easy,” he said. The long-term trend for Netflix on smart TVs is “exciting and positive,” he said.

According to Netflix’ Q1 letter to shareholders, the company has made “significant investments” in the streaming library over the last 18 months, and “meaningfully increased the quantity and quality of the TV shows and movies on the service.” The company recently inked a multi-year licensing agreement with The Weinstein Company for exclusive foreign language, documentary and movie content for U.S. Netflix members, it said. Academy Award Best Picture winner “The Artist” and the documentary “Undefeated” will be shown in their Pay TV 1 windows exclusively on Netflix, it said.

For Q2, the number of exclusive titles has increased to include “Killer Elite,” “In the Land of Blood and Honey”, “Drive”, and “The Rum Diary,” it said. Epix titles “Thor” and “Transformers: Dark of the Moon,” will be available on Netflix this quarter, it said. Netflix reported “no discernible change in churn or viewing levels” following the end of its deal with Starz in February for 15 Disney Pay TV 1 output titles, plus catalog films.

Netflix sees its biggest long-term competition for viewing hours from MVPDs and cable networks through their TV Everywhere offerings. The company cited HBO GO and Comcast’s Xfinity application which became available on the Xbox and Comcast’s Streampix streaming service. Its content selection, user interfaces and “device ubiquity,” give Netflix a competitive advantage, the company said. “We don’t currently see any meaningful near-term impact on our business from these developments,” Netflix said.

In its international markets, Netflix surpassed 3 million streaming members in Q1, up 65 percent over Q4 2011, and added 1 million paid subscribers, the company said. Six months after Netflix’ first international launch, non-U.S. subscribers represent almost 10 percent of paid streaming members, it said. The launch of Netflix service in the U.K. and Ireland in early January brought the most net additions in the first 90 days of an international market launch.

Growth in Latin America, however, will be slower, due to payment and subtitling issues. “Odds are,” Hastings said, profitability “will take longer than two years.”