Netflix plans to launch streaming-only service as company reports subscriber growth

After building a successful business by shipping millions of DVDs every month in the mail, Netflix expects by the end of this year to start letting subscribers give up the shiny discs.

In prepared remarks for a conference call discussing the company's strong third-quarter earnings, Chief Executive Reed Hastings said Netflix was looking to offer a new lower-cost plan through which subscribers could access movies and TV shows solely online.

The company last month started offering a streaming-only service in Canada for $7.99 per month. Hastings said success there has led Netflix to test an identical offering in the U.S. If the test fares well, all consumers will be able to sign up for streaming-only service. Hastings did not identify a price, but it is likely to be the same as it is in Canada.

Netflix will still offer user its current subscription plans, all of which include Internet streaming and DVDs through the mail.

The move comes as Netflix will for the first time deliver more hours of content via the Internet than on discs. In addition, Netflix is now spending more on content for its streaming service than for discs. That's due largely to a new five-year deal worth $1 billion with pay cable channel Epix, which is providing movies from Paramount Pictures, Lionsgate, and Metro-Goldwyn-Mayer.

"By every measure we are now primarily a streaming company that also offers DVD-by-mail," Hastings said. "DVD-by-mail shipments are still growing, but streaming for us is much larger and growing much faster."

Sixty-six percent of subscribers watched at least 15 minutes of content from Netflix online in the quarter ended Sept. 30, up from 61% in the second quarter. Most are doing so with a growing number of digital devices that have Netflix built in, including Apple TV, video game consoles, and Internet-connected televisions.

The company added 1.93 million subscribers in the third quarter, bringing its total as of Sept. 30 to 16.9 million. Six percent of those were in a free trial period. 

Netflix's subscriber growth has been accelerating recently as more consumers cut back on DVD purchases and turn to lower-priced rentals. The number of new subscribers grew 279% from the same quarter a year ago.

Revenue grew 31% to $553.2 million while net income rose 26% to $38 million.

In further positive news for the Los Gatos, Calif.-based company, marketing costs declined to a record-low $19.81 per new subscriber, which Chief Financial Officer Barry McCarthy attributed to improvements in the quality of the online experience. Churn, the percentage of subscribers who canceled, also tied a record low of 3.8%.

However, as more consumers stream movies instead of watching them on disc, they're opting for lower-priced plans that don't offer as many DVDs out at one time. Average monthly revenue per subscriber last quarter was $12.12, down 9% from a year ago.

Netflix stock was up 7% in after-hours trading after it closed at $153.15 on Wednesday. Shares were up 3% before financial results were released.

By the end of the year, Netflix expects to have between 19 million and 19.7 million subscribers.

-- Ben Fritz

Photo: Netflix CEO Reed Hastings. Credit: Roger Galbraith / Reuters

Comments

[Jeremy D Brooks]

...which is great news if you enjoy movies with titles containing roman numerals III and higher, Finnish works, 18 month old TV shows, and documentaries on sea life. Until they expand their selection to include popular, current, and new DVD releases and current (current season) TV, streaming-only services aren't worth it.

[EC]

Great news. I've been using Netflix streaming since it launched for the Wii last spring, and it now accounts for about 90 percent of the TV watching I do.

[Neil Stephenson]

What this article doesn't mention is how awful the streaming-only selection in Canada is. I signed up for a one-month, free-trial and spent an hour looking through their selection. I found one movie I was really interested in watching. I've since cancelled my subscription until the selection is drastically improved.

[Nathan]

The Canadian version is a joke. Most of the movies are straight to DVD garbage. The most popular or successfull film was Terminator 2. Man add some half decent TV shows or start offering disc shipments in canada. I'd prefer an option that let's me get the disc via mail if the selecting online is this garbage. Ugh. After my one month free il be cancelling

[pat]

I strongly dislike this, considering I don't have the greatest internet, which completely rules out streaming. Keep the discs.

[Stephanie]

I'm not sure if I like this idea too much. Would this mean that ALL movies (including those digging-in-the-crates limited kind flicks) would be available for stream?

The only reason I still opt a disc over stream is because of CAPTIONS. Netflix should invest more into providing the closed captioning feature.

[Johane]

This will be great if the streaming is the same as what is available on dvd. If we can pay the $8 per month and watch whatever movies/tv I'd be very happy with them. The streaming I have now with my Wii is good but the selection is limited.

[Mike Lowell]

I would say that some of the people leaving comments here are the minority. Most people have a fast internet connection now-a-days, and while I understand the need for closed captioning, the majority of people (other than my dad) don't need this. They will always keep the option of sending out discs, but at a premium since it would cost more in warehousing the discs and postage. The average young subscriber, like myself, wishes that the whole catalog of movies were streaming because of the devices we're using to watch them (iPhone, PS3, Mac/PC). Also, a downside to NetFlix is that if I want to watch a title now, I don't want to have to wait for it to come in the mail over the next day or two. Just my 2 cents.

[MENUSK]

I hope they dont go completly digital since only the discs provide surround sound. i would cancel my subscription immediately and go to redbox or (gasp) blockbuster if theres still one open around me.

[SadCadillac]

How about reduced rates on mail service ONLY packages? I don't have Internet service at home and Firewall prevents me from using Netflix's streaming service at work. How is fair that Netflix charges me a premium for Blu-Ray access - an additional $4/month, when it's obvious they're investing the majority of their revenue in bolstering their streaming services?!?