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Disney departure looms for Netflix

Q4 rebound no reprieve from next hurdles

If reporting a rebound in the number of streaming subscribers was going to allow Netflix to earn back some respect, the number of obstacles still ahead is enough to give pause to even the company’s most ardent supporters.

Shares for the Los Gatos, Calif.-based firm surged in after-hours trading after its fourth-quarter earnings beat estimates. Shrugging off the doldrums that descended late last year, Netflix managed to add 220,000 domestic streaming subscribers in the quarter, ending the year with 21.67 million subs.

But founder Reed Hastings acknowledged a host of fresh challenges to come on a conference call with analysts Wednesday, from the pending loss of top-shelf Disney films that were part of its deal with Starz that expired last year to his expectation that Amazon plans to challenge Netflix with a cheaper standalone subscription service.

In a letter to investors accompanying the company’s fourth-quarter numbers, Hastings warned that Netflix’s only “significant” loss in Febr uary was 15 Disney titles, including “Toy Story 3” and “Tangled.” Also part of the Starz deal were Sony films, but they disappeared earlier last year.

But Hastings added that the Disney content only constituted 2% of domestic viewing and that Netflix would compensate for the loss with a fleet of films that would hit the service in the coming years via deals that, like the Starz/Disney pact, fall into the pic’s pay-TV window, including titles from DreamWorks Animation, Relativity, FilmDistrict and Open Road as well as Paramount, Lionsgate and MGM, through the latter trio’s Epix partnership.

The exclusivity period of Epix’s five-year deal with Netflix, estimated to be worth $1 billion, ends this fall, meaning that those movies may be licensed to Netflix competitors. Hastings also alluded to a long-speculated entry into the subscription VOD marketplace from Amazon, which to date has not confirmed the launch of any service beyond its existing services, Unbox and Prime.

In the same breath, he bashed both Amazon and another existing SVOD entry, Hulu Plus. “Actually Hulu Plus and Amazon are quite small bidders compared to the cable networks that we bid against,” he said on the conference call.

Netflix’s competition for content is the cable networks, Hastings explained, where the company is angling for exclusive deals in part because that’s what the other bidders are seeking. He also confirmed that Netflix was looking to bid for theatricals against pay-TV players like HBO, in addition to exclusive off-net deals like its pact with Lionsgate for “Mad Men.”

Hastings also sought to contain expectations for the company’s first foray into original programming in February, when licensed series “Lilyhammer” premieres. Comparing Netflix to HBO, he said the company will spend carefully, though he didn’t specify numbers. “Today it is a modest part of our budget and we’ll keep that budget until we learn more year by year,” he said.

Coming after “Lilyhammer” in 2012 is an adaptation of the BBC drama “House of Cards,” followed next year by a revival of the Fox series “Arrested Development.”

Hastings also signaled that Netflix would dial back an unspecified amount in the coming quarters on its content spend as compared with its fourth-quarter expenditure, which was more than 100% higher than its expenditures in same period in 2010.

Domestic DVD, the company’s root biz, lost 2.76 million subs from the third quarter to the fourth, ending the year with 11.17 million. That business has been eroding rapidly as people increasingly use Netflix’s streaming service rather than its disc-by-mail offerings.

Despite that dip, it appears the company added subs overall quarter to quarter, reporting an increase of 610,000 subs to 24.4 million. That’s something it failed to do in the 2011 third quarter, when it lost subscribers for the first time in its history after several badly presented pricing and reconfiguration initiatives angered some customers.

Hastings sought to play down the impact of the 56-day delay that Warner Bros. recently instituted in making its homevid titles available to Netflix and other services. While clearly displeased with the extension from 28 days, he said disc rentals heavily skewed toward catalog titles.

Jill Goldsmith contributed to this article

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