Flixing its muscle

Netflix DVD service looks abroad

WASHINGTON — Netflix is going global.

The online DVD rental company said Wednesday that it will begin offering its service in Canada and the U.K. in 2005, or possibly late 2004, as a first step toward a broad global thrust.

The company also is eyeing the movie download business and said it will spend this year getting ready to launch a limited download service in 2005.

“We’re developing some solutions for downloading movies in 2005 and beyond,” CEO Reed Hastings said in a conference call to discuss the company’s fourth-quarter earnings. “We plan to offer our subscribers a choice of receiving movies on DVD or by download. Next year will be somewhat early for downloading, and we expect only modest consumer interest initially. But we think it’s a business that will grow over time.”

Bottom line improves

Netflix reported net income of $2.3 million for fourth quarter 2003, compared to a net loss of $2.2 million in the 2002 quarter.

For the full year, net income was $6.5 million, compared to a loss of $20.9 million in 2002.

Revenue for the quarter surged 80%, to $81.2 million, compared to $45.2 million in the prior year.

For the year, revenue reached $272.3 million, up 78% from 2002, when it was $152.8 million.

Excluding the costs of stock-based compensation, income for the quarter was $6.1 million, compared to $463,000 in the prior year. Adjusted net income for the year was $17.2 million, compared to a loss of $1.4 million in 2002.

The company announced a 2-for-1 stock split, effective Feb. 12.

Shares of Netflix closed down $1.95 Wednesday, to $65.80, but was up strongly in after-hours trading.

Subscriber rolls grow

The announcement of the company’s international expansion plans comes as Netflix subscribers in the U.S. reached 1.5 million.

The company said its subscriber rolls are growing more rapidly than expected and should reach 2.25 million-2.5 million in the U.S. by the end of this year.

In an interview, Hastings said expansion beyond the U.K. and Canada would depend on initial results in those two countries.

Local operations

All shipping and receiving of discs will be handled locally, and the company will set up separate Web sites and maintain separate inventories for each territory.

“We’ll follow the existing windows for each region,” Hastings said. “We’ll have movies in the U.K. at the same time that Blockbuster has them there. We’ll also follow the regional coding rules.”

Hastings said he does not expect international sales to top 20% of total revenues “for quite a while, because the U.S. is growing so fast.”

Netflix’s U.S. revenue for 2004 is projected to reach $450 million-$475 million.

Expectations for the download business are modest for the short term.

“The big issues there are the amount of (Internet) bandwidth into people’s homes, and then the last 10 feet, from the PC to the TV,” Hastings said. “Until (downloading) becomes more of a TV viewing experience, it will be a niche market.”

Several major computer makers are planning to introduce “media PCs” in 2004 that will connect to the Internet as well as the TV set.

“You may see a million or 2 (million) devices in people’s homes in 2005 that connect the PC to the TV,” Hastings said.

Downloads in package

Downloads will be offered as part of the same subscription package as DVD rentals.

“We think the key for the consumer and for Netflix is to allow consumers the choice, on the same subscription, of getting movies by download or by DVD through the mail. We want it to be as transparent as possible for the consumer.”

Initially, however, consumers will face limits.

“Not all titles will be available initially for download because of the difference in windows,” Hastings said.

Movies for download generally become available during the pay-per-view window, about 45 days after their release on DVD.

Another issue: securing download rights. “We have 18,000 titles in our catalog, so clearing all the rights is going to be a challenge, especially music rights,” Hastings said.

Even where contracts allow music use on DVDs, those rights typically don’t cover downloads, which must be cleared separately.

TV ad expansion

With its sub count continuing to grow rapidly, Netflix plans to step up its marketing this year by expanding its recent test of TV advertising.

To date, the company has relied primarily on online advertising as well as word of mouth.

Company officials said subscriber acquisition costs would increase about 10% this year, to about $35 per sub, to cover the additional cost of TV advertising.

“But because we’re a subscription service, with an ongoing revenue stream from each customer, we expect total marketing costs will fall as a percent of revenue,” Hastings said.

In other news, Netflix said chief financial officer Barry McCarthy will leave the company at the end of 2004.

“It’s time for me to find a challenging CEO or COO role of my own,” McCarthy said.

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