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Netflix plans to expand online efforts

NEW YORK — Even as Netflix orders up whopping profits for its snail-mail biz, company wants to reinvent itself as a digital powerhouse.

Netco’s fourth quarter saw earnings go from $143.9 million to $195 million and profits spike from $5.6 million to $38.1 million. But these days it’s digital downloading that weighs on execs’ minds.

Company spent much of a call with analysts Tuesday discussing downloading plans — it announced it will invest $5 million-$10 million in technology in 2006, while chief financial officer Barry McCarthy predicted Netflix will “lead the future of digital downloading.”

Netflix has been one of the most successful entertainment companies of the past year — particularly in its Wall Street valuation — but over the past few months has faced growing investor unease about its ability to compete with nascent downloading services like Movielink and the iTunes Music Store.

So far, Netflix had stalled in its attempts to offer on-demand service via the Web; a partnership with TiVo fell through last year, and the company has been vague about other plans.

Execs, though, say the company’s large customer database and its knowledge of consumer preferences will help Netco shift to digital model.

But CEO Reed Hastings cautioned that studios’ lucrative TV output deals would provide drag on a wide range of films being available for download — to the benefit of Netflix’s snail-mail biz.

Whatever the format, Hastings said the company stands to benefit from collapsing theatrical-DVD windows. “While full simultaneous release may take some time for all studios to support, the economic logic of it is unstoppable,” he said. The announcement of near-day-and-date release for Steven Soderbergh’s “Bubble” was cited as encouraging news for Netflix model.

CEO made other predictions, including $50 million-$60 million in pretax earnings for fiscal 2006 and growth to 20 million subs, from about 4 million, by as early as 2010.

On Tuesday the company also said it would begin offering the hi-def and Blu-ray formats as soon as they become available later this year, though consumer interest in both is questionable.

For the fourth quarter, company outstripped expectations on many fronts, including the all-important churn rate, which measures the rate at which existing consumers defect from the service. Number dropped to 4% from 4.3% in the third quarter.

By the market’s close Tuesday, Netco’s stock rose $1.46 to $24.74, and continued to climb in after-hours trading.

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