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Netflix fast growth continues in first quarter as company defends itself to Hollywood

April 25, 2011 |  3:06 pm

As Netflix Inc. reported continued strong growth in the first quarter, the company argued that it's a financial boon to Hollywood in hopes of easing fears that its rapid rise is a threat to traditional business models.

The Los Gatos-based online streaming and DVD rental company added 3.59 million subscribers in the three-month period ended March 31, bringing its worldwide total to 23.6 million. Netflix said that 3.3 million of the new customers were in the U.S., where it now has 22.8 million subscribers, while 290,000 were in Canada, boosting the total in that country where it launched last September to 800,000.

Netflix now has as many subscribers in the U.S. as Comcast Corp., the nation's largest cable company, as of Dec. 31, 2010. Comcast has yet to report its first quarter figures.

Worldwide revenue jumped 47% to $719 million and net income increased 88% to $60 million. Those figures were on the high end of what Netflix had told shareholders to expect in January when it reported its last quarterly financial performance.

In a letter to shareholders accompanying the results, Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells suggested that film and television studios shouldn't view their success as a threat. Executives at some companies such as Time Warner have argued that selling films and television shows to Netflix undermines other established businesses such as pay cable networks and syndication.

But the Netflix executives pointed out that subscribers to cable and satellite television services grew late last year despite their company's success. "Looking at it from all of these angles, content owners that license to Netflix make more money -- now and in the future - -than content owners who don't license to Netflix," Hastings and Wells wrote.

In response to arguments that Netflix is moving to directly compete against cable networks with its purchase of premiere rights to the upcoming Kevin Spacey drama "House of Cards," the executives characterized the deal as an experiment. The goal, they said, is to see if Netflix can build an audience for serialized programs. "Rather than a shift in strategy towards original programming," they wrote, "our decision was driven by a desire to test a new licensing model using a small portion of our content budget."

With the Canadian service on track to reach about 1 million subscribers by June, Hastings and Wells said Netflix will enter its second foreign market by early 2012. They didn't identify where it would be, but people familiar with the matter have said it will be either Latin America or Britain.

Hastings and Wells also cited the growing threat of competition for subscription-based online film and television streaming, noting that Hulu and Amazon are expanding their offerings. They added that they expect Dish Network to launch a similar service under the Blockbuster brand, which the satellite company recently acquired for $320 million. Also, Wal-Mart is weighing launching a competing offering under its Vudu brand soon, people familiar with the matter have said.

Netflix stock was down 5% in after-hours trading Monday, as investors were somewhat disappointed in the company's estimates for its performance in the current quarter, according to Bloomberg. The company said it would have between 24 million and 24.8 million subscribers in the U.S. by June 30 and between 900,000 and 1.05 million in Canada. Net income is expected to be between $50 million and $62 million.

Shares in Netflix closed down a fraction at $251.67 Monday before financial results were released.

-- Ben Fritz

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