Netflix sees subs surge in 2nd qtr.

Number reflects a higher-than-expected penetration rate

Online DVD rental shop Netflix reported subscriber numbers of 2.09 million in the second quarter, up 8% from the previous quarter and 87% from the same period last year.

Tally was at the high end of company forecast and reflects a higher-than-expected penetration rate. It came despite the recent price rise from $19.95 to $21.95 per month for the all-you-can-eat rental service. Company said 97% of its total are paying subs, with 69,000 free trial users.

Growth indicates Netflix is fending off its only high profile competitor, Wal-Mart. But Blockbuster is rolling out an in-store subscription service and will launch online by the fourth quarter, giving Netflix its first serious challenge.

Thus far, however, analysts say the stock market high-flyer has strong brand positioning, relatively low churn rates and a strong market niche among film enthusiasts.

Management aims to reach 5 million subs nationwide (a penetration rate of around 5%) by 2006, at which time it should generate some $1 billion in sales. By the same time, Blockbuster has said it wants to take at least 30% of the online DVD rental market

Netflix also aims to distribute films online next year with the launch of a video-on-demand service, although it hasn’t revealed any details.

Nationwide, Netflix claims to be in 1.8% of homes, up from 1% last year. Company is particularly strong in certain urban areas. Penetration in the San Francisco Bay Area reached 7.6% of households at the end of the second quarter on June 30, compared to 5% a year earlier.

Company is due to release its second quarter financial results on July 15.

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