Biz booming at rental giant as customers enjoy streaming content

Three years after it first offered movies online, Netflix’s evolution from a DVD mail service to a full-blown streaming service is moving at warp speed. For the first time, its nearly 17 million subscribers will spend more time streaming movies and TV shows over the next several months than watching them on DVD, the company said Wednesday.

In reporting third-quarter earnings, Netflix said subscribers grew by 52% in the third quarter vs. the year-ago period, up to 16.9 million from 11.1 million, and revenues rose 31% to $553 million.

As Netflix tracks the progress of its first foray outside the U.S. — a streaming-only service launched in Canada in the third quarter — CEO Reed Hastings said the company will consider further expansion beyond North America starting in the second half of next year. Hastings also said Netflix was testing an online-only subscription plan for a lower monthly fee.

Net profits at the Los Gatos, Calif.-based company rose 26% in the quarter to $38 million.

The third quarter could stand as a watershed for Netflix. In addition to making its first push internationally, it announced in August an historic deal with the partners of the fledgling pay TV service Epix — Paramount, MGM and Lionsgate — under which Netflix will pay the studios more than $900 million over five years to stream their movies.

That deal has already added 1,000 new titles to Netflix’s streaming library, said Hastings. Netflix no longer reveals how many titles are in its streaming library for competitive reasons. It is believed to be more than 20,000.

“The virtuous cycle for us,” said Hastings, ” is acquire more streaming content, which helps grow our subscriber base and lessen our DVD-by mail expense, which in turn provides us with great financial resources to acquire more streaming content, improve the user interface and continue to grow the subscriber base.” The company still spends more than $500 million a year on postage.

While Netflix is available on scores of devices, Hastings said a key development the company is focused on is Wi-Fi-enabled TV sets, which he believes will substantially boost subscriptions.

In a Q&A session, Netflix execs steered clear of talking about competitors such as Hulu, Amazon, Walmart and even kiosk retailer Redbox. But Hastings said he considered cable operators to be a competitor, conceding their library offerings are much larger. “We are the motorcycle and they are the car,” he added. At the same time, Hastings said that when it comes to high-speed data services from cable companies, he considers cable to be an “ally.”

In terms of cord-cutting, in which subscribers drop their pay TV service to watch shows free online, Hastings said, “We still see no evidence that our subscribers are cutting the cord at a greater rate than the general population.”

The share of subscribers who watched at least 15 minutes of a streamed TV show or movie in the third quarter grew to 66% vs. 41% in the same period in 2009.

And apparently the convenience of streaming is helping to retain subscribers: Churn was down to 3.8% in the quarter from 4.4% last year. Subscriptions range from $9.99 a month to $23.99 a month.

Netflix provides its “Watch Now” Internet streaming service on devices including TiVo DVRs, Roku, Apple TV, Google TV, Microsoft Xbox 360, Sony PlayStation3, Nintendo Wii and many Internet-connected TVs and Blu-ray Disc players.

Netflix reported earnings after the market close; its shares rose $10.10, or 6.6%, to $163.25 in after-hours trading. The company said it expects to end the year with as many as 19.7 million subscribers and with revenues of $2.2 billion.

Netflix now represents more than 20% of downstream Internet traffic during peak times in the U.S. — and its traffic is heaviest in the primetime hours of 8 to 10 p.m., according to a new report from bandwidth management equipment vendor Sandvine.

(Marc Graser contributed to this report.)

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