Netflix grows at Blockbuster's expense

A year after it slashed prices in an aggressive move to hold off competitor Blockbuster, Netflix is moving in for the kill.

Third-quarter earnings reported Wednesday showed Netco is continuing to boom, surging ahead of its nearest competitor on the Net and directly challenging those in the non-virtual world as well.

Rather than taking the opportunity to raise prices and focus on profits, Netflix is looking to use its position to put the permanent kibosh on remaining challengers. CEO Reed Hastings said company will test further price cuts over the next six months to see if it can accelerate growth further without sacrificing margins.

“If there is enough elasticity to make additional price points work, this would increase the economic pressure on video stores and additional store closures would further increase Netflix growth for many years ahead,” he told analysts in a conference call.

Company has already had some success with a new plan that offers one DVD for $9.99 per month, rather than the standard three for $17.99.

Blockbuster, meanwhile, which recently delayed its goal of reaching 2 million subs until sometime next year, is facing heavy losses thanks to its “no late fees” promotion, and is in the midst of closing money-losing stores.

In addition to shutdown of physical vidtailers that send business his company’s way, Hastings said shrinking windows will help Netflix as DVDs reach consumers even quicker, giving them more reason to skip the theater and wait to watch at home.

Last quarter, Netflix grew by 396,000 subs, more than doubling net adds from a year ago and bringing its total to 3.6 million, well ahead of guidance. Netco also upped its predicted total for the end of the year from 3.85 million-4.05 million to 4 million-4.2 million.

Profits remain small, totaling just $6.9 million, down significantly from $18.9 million a year ago when its price was $4 higher and sub total was 2.2 million.

Growth remains the name of the game, as Netflix is calling for pretax income of just $50 million to $60 million next year, but looking to reach at least 5.65 million subs by the end of 2006 and 20 million in the 2010 to 2012 time period.

Hastings is also hoping for a boost from the launch of high definition DVDs, though he said Netflix remains agnostic between competing Blu-ray and HD-DVD formats.

Plans to garner growth from Internet downloads are now on indefinite hold, however, Hastings said, as a lack of available content have caused him cancel a launch planned for the end of this year.

“We face the same obstacles Movielink and Comcast and Apple have faced licensing movies,” he said. “Our shared opponents are TV channels that pay large sums to get multiyear exclusive access to studio films.”

Of course, relatively paltry content and late windows due to existing distribution deals were already a problem in the Net VOD space when Netflix announced plans to enter last year. Netco apparently hoped it could leverage better terms from the studios, but was unsuccessful.

Netflix is still aiming to start generating revenue outside its monthly subscription fees. It recently started selling used DVDs from its inventory to subscribers and plans to expand that practice. Netco will also begin selling advertising space on its site, which could prove lucrative given its large and growing base of movie fans.

Next year, however, those nascent businesses are expected to generate just $8 million to $16 million.

Netflix finished the third quarter with $174.3 million in revenue, up 23% over a year ago. Subscriber acquisition costs were down somewhat at $35.69.

And, in a key metric for the stability of its business, subscriber churn, or the percentage of existing subscribers who cancelled, hit a record low of 4.3%.

Shares in Netflix rose 3% to $28.35 before earnings were announced, but were down about the same amount in after-hours trading. For the year, Netflix stock is up 130%.

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