Netflix Not Ready to Crown Blu-ray King, CEO Hastings Says
Blu-ray “has the advantage in the format war, and consumer adoption of Blu-ray will likely accelerate if Blu- ray can maintain the advantage,” Netflix CEO Reed Hastings told analysts Wednesday in a quarterly earnings call. Still, Netflix isn’t ready to declare Blu-ray the winner over HD DVD, Hastings said.
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If Blu-ray reaches such “milestones” as getting hardware prices below $200 and landing Universal and Paramount support, Netflix will reconsider, Hastings said. Only then will Blu-ray consumer adoption “take off,” making it the winner, he said. “This would be a positive for the studios and a positive for Netflix, as it would fuel another decade of robust disc-based entertainment.”
In Q-and-A, Hastings again wouldn’t budge when analysts tried to get him to anoint Blu-ray. True, Netflix has seen “sharp growth” in Blu-ray’s favor “since the announcement of Warner flipping over,” Hastings said. But “we have been in that camp before,” he said, citing HD DVD’s big “surprise” when Paramount dropped Blu-ray support, prolonging the format battle. “Definitely the winds are shifting to Blu-ray,” but there’s “nothing done yet,” Hastings said.
One analyst asked how Blu-ray’s apparent win might affect Netflix subscriber acquisition costs (SACs). “You are assuming that Blu-ray is going to win there and I made the mistake -- I don’t know, a year or two ago before the HD DVD camp flipped Paramount - of thinking the same,” Hastings replied. “So remember that we are all judging it by studios.” Should HD DVD “manage to flip another studio to their camp, then we're back to stalemate again,” he said. And if Blu-ray does win, that “will have an effect” on SACs, he said. Blu-ray “costs a little more, so that will have an effect upon us in terms of content costs,” he said.
Don’t expect Netflix to sign many more deals this year with set-top makers, Hastings said. Netflix can’t rule out “a few more agreements this year,” but its focus now is on the LG deal announced just before CES (CED Jan 4 p2). Netflix signed on with LG in the first of a planned series of pacts it hopes will yield 100 “partner products,” ranging from DVD players to videogame consoles, the company said in early January. “We expect to announce many other partners in the next year or so and our goal is to be in lots of boxes to get Netflix to the TV,” the company said then.
But Hastings seemed to be singing a somewhat different tune Wednesday. “The thing that'll make us popular in the CE community is if we do a great job with LG and they sell a lot of their devices because of the Netflix service and they make a lot of money off of that,” Hastings said. “Then other people are going to want a part of that success.” Netflix’s “core focus” shouldn’t be on how broadly “can we license today,” he said. “The best strategy is to really do a good job on the total CE integration,” he said. Once that’s mastered, the plan is to “expand that much more broadly in 2009,” he said.
Netflix “never thought about not partnering” with CE makers, but did weigh bringing its own set-top to market, he said. In the end, “what we came to realize is there was enough partner interest and enough consumer interest that we researched that we really didn’t need to do our own thing also,” Hastings said.
Netflix posted stronger results for its Q4 and fiscal year ended Dec. 31. Q4 revenue grew 9 percent to $302.4 million from a year ago, as profit widened to $15.8 million (24 cents per diluted share) from $14.9 million (21 cents) in 2006. For the year, revenue jumped 21 percent to $1.205 billion, while profit reached $67 million (97 cents) from $49.1 million (71 cents).
Netflix ended the year with about 7.5 million subscribers, up from 6.3 million a year ago, after gaining a total of 451,000 net subscribers Q4, it said. Q4 gross subscriber additions totaled 1.5 million, flat from a year ago, Netflix said. Of the 7.5 million subscribers, about 98 percent -- 7.3 million -- were paying subscribers.
Results improved “despite facing tough competition for much of the year and investing strategically in our online video initiatives,” said Hastings. The company will spend less on marketing in 2008 than in 2007, Chief Financial Officer Barry McCarthy told investors.
Netflix expects to report sales of $323 million to $328 million, a profit of $9 million to $14 million (13-21 cents), and a total of 7.85 to 8.05 million subscribers for Q1 2008. For 2008 overall, it expects to report sales of $1.3 billion to $1.35 billion, profit of $75 million to $83 million ($1.12-$1.24), and a total of 8.4 to 8.9 million subscribers. Even with the mostly positive news, Netflix shares were down 6.52 percent at $22.21 in late afternoon trading Thursday.