Netflix going strong

DVD-by-mail renter shows 74% sub growth

NEW YORK — Is online DVD rentailer Netflix ready for Main Street?

Having already wowed Wall Street with 400%-plus stock price gains in 2003, the subscription-based DVD movie rental club is quickly proving that its model not only works, but has plenty of room for growth beyond its niche. Many of its supporters insist the company is proving more resilient to competition from retail giants like Wal-Mart and Blockbuster than skeptics predicted.

Determined to prove it’s no fair-weather fluke, Netflix announced Friday it finished 2003 with subscriptions up a hefty 74% year-over-year to 1.49 million from 857,000. Some 95% of that base is paying subscribers, with 71,000 new trial subscribers.

The Los Gatos, Calif.-based company had already predicted a better-than-expected finish to the year, and management has indicated company’s on track to reach 5 million subscribers and $1 billion in sales in the next three to five years. The stronger Netflix becomes, according to analysts at investment firm PiperJaffray, the less vulnerable it may be to new online rental rivals.

Int’l agenda

Also on the Netflix agenda is expanding internationally, starting in Canada and Europe. DVD player penetration overseas stands at only 20%-30%.

The growing herd of bulls flocking to Netflix shares seem to be justifiably optimistic about the company’s longer-term prospects.

DVD disc sales are tied closely to player sales, so the still-breakneck pace of hardware shipments bodes well for Netflix subscription growth.

With DVD players now priced as low as $50, Consumer Electronics Assn. data indicates DVD player shipments were up around 30% in 2003. That would bring the installed base to roughly 60 million units, according to various market research studies. At around 50% of U.S. homes, that leaves plenty of room for growth. Analysts reckon DVD penetration should reach just under 80% by 2006, or around 88 million units.

Netflix also enjoyed a fourth-quarter 2003 boom thanks to the release slate, which boasted 15 films released into the video/DVD window with box office grosses of $100 million each. That compares to 10 such titles a year ago.

Furthermore, some 80% of last quarter’s vid release titles were rated either PG-13 or R. Research indicates that G- and PG-rated films perform best in sell-through, while PG-13 and R-rated titles have the strongest rental outings.

Distribs enthusiastic

Distributors also are rooting for Netflix to be more than a fad. Hollywood studios are heavily reliant upon the DVD windfall. In the first half of 2003 alone, studios spent $410 million marketing pre-recorded video content, according to TNS Media Intelligence/CMR. That ad spending marked a 56% increase from 2002 levels.

Still, some may be concerned Netflix is riding the crest of a bubble. Encroaching competition by Blockbuster, which is getting more aggressive with DVD rentals in-store and online, could put more pressure on the smaller firm.

The service is hardly mainstream, with its slightly awkward mail-out/send-back subscription-based model. In its statement Friday, Netflix said its national household penetration stands at around 1.3%, up from 0.73% at the end of 2002. In the San Francisco Bay area, however, penetration is 5.9% of households.

Company says its 20 regional shipping centers allow it to service 80% of the U.S. with next-day delivery.

Netflix execs have noted in the past that despite its marginal share of the total U.S. market, it accounts for a disproportionately large share (some 30%) of art/indie film rentals.

Impulse shoppers

Netflix is no quick fix for impulse shoppers who may, longer term, opt for VOD or stick with brick-and-mortar outposts like Blockbuster for spur-of-the-moment vid rentals. Mass discount marketers like Wal-Mart are claiming the lion’s share of DVD sell-through dollars, though their title selection runs far more middle-market than Netflix’s.

But for cineastes, particularly those with an indie film appetite, Netflix’s $19.95 a month, all-you-can-eat movie rental service evidently fits the bill. Users have access to more than 15,000 DVD titles and can hold three titles at any given time.

Company also is working to enhance its art-film offerings, recently adding the Independent Film Channel series “Dinner for Five” to its lineup.

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