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

October 20, 2010 |  3:21 pm

Netflix2 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

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