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Netflix DVD biz flies as VHS flutters

Online rental store sees higher-than-expected growth

NEW YORK — Who says the video rental business is slowing down?

Online DVD rental shop Netflix saw its shares soar nearly 13% Wednesday to $50.49 when it upgraded its fourth-quarter subscriber forecasts, due to higher-than-expected growth for its subscription rental service.

Netflix expects to have between 1.47 million and 1.495 million subs by the end of the fourth quarter, a slight improvement on its earlier projections of 1.425 million-1.475 million.

Better yet, company said fewer customers are dropping out of the service, with average monthly subscriber churn of 4.7%-5%, compared to its earlier range of 4.9%-5.4%.

Blame VHS

The steady gains come as the overall market for video and DVD rentals fell 1.6% in the third quarter of 2003 compared with 2002, according to research by Alexander & Associates. However, the firm notes DVD rentals in October were up a whopping 83% compared with the same month a year ago, suggesting the real culprit is VHS, the part of the rental market still dominated by Blockbuster.

Overall, Netflix predicted its revenues for the quarter will come in between $80 million and $82 million, up from earlier predictions of $77 million-$81 million. Excluding stock-based compensation, Netflix predicts a profit of $4.5 million-$6.5 million, compared to $3 million-$6 million.

Netflix customers pay $19.95 per month for access to some 15,000 film titles, which they can keep as long as they like with a maximum of three moves out at any time. No late fees or shipping fees for returned discs are required. Netflix claims it can serve more than 80% of its subscribers with next-day delivery.

Boosted by DVD boom

Despite new competition from larger retailers like Blockbuster and Wal-Mart, pioneer Netflix seems to be holding its ground. According to Thomas Weisel Partners, Netflix is a major beneficiary of the continued boom in DVD players, spurred in part by low-cost units this holiday season.

Netflix’ addressable audience of U.S. television households could exceed 55% by year’s end, noted Thomas Weisel analyst Gordon Hodge. He added that traffic to Netflix’s site increased 71% in October to 5.3 million unique users.

New rival services from Wal-Mart and Blockbuster “don’t appear to be increasing their commitment to online marketing, according to our keyword-search analysis,” Hodge said.

He forecasts DVD penetration will hit 90% of U.S. TV households in 2005 and expects Netflix to continue to outpace the installed base growth.

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