Netflix income up 36% for 2007

Closed year with 7.48 million subscribers

By Jennifer Netherby -- Video Business, 1/23/2008

JAN. 23 | After a rough-and-tumble year battling Blockbuster Online, Netflix beat analysts expectations Wednesday, reporting a 6% increase in fourth-quarter earnings and a similar increase in new subscribers during the period.

Netflix earnings grew 6% to $15.8 million in the quarter ended Dec. 31. Revenue was up 9% to $302.4 million for the period.

For the full year, net income shot up 36% to $67 million. Revenue was up 21% to $1.2 billion.

During an afternoon conference call, Netflix CEO Reed Hastings said the company saw a jump in subscribers after Blockbuster raised prices in the quarter, but he warned that its biggest competitor “isn’t going away.”

Still, Hastings predicted that “any further attack” by Blockbuster wouldn’t “be as painful” to Netflix as it was in the last year.

Netflix took a hit on earnings and subscriber growth in the first part of 2007 when Blockbuster Total Access began allowing customers to rent movies in stores for the same subscription price. Blockbuster pulled back on those offerings and increased subscription prices later in the year.

Netflix said it continued to widen the subscriber gap over its competitor in the most recent quarter. The retailer added 451,000 new subscribers during the fourth quarter, closing the year with 7.48 million subscribers. The company said it expects to close 2008 with between 8.4 million and 8.9 million subscribers, adding more new subscribers than it did in 2007.

Meanwhile, the company is preparing to battle new online competitor Apple iTunes, which began selling movie download rentals last week, prompting some analysts to warn iTunes could steal customers from Netflix and Blockbuster.

But Hastings said the company doesn’t view cable video-on-demand or Internet VOD (such as Apple’s offering) as a short-term threat, noting that DVD rental has remained stable over the last five years as VOD has grown in availability.

“DVD is simple, cheap and ubiquitous, all of which make it appealing to customers,” he said.

At the same time Hastings talked up Netflix’s online offerings, saying the company hopes to begin offering its Instant Watch streaming service to users with Mac computers this year. The service has so far been available only on PCs because of digital rights management restrictions.

Netflix also will expand its streaming service to high-definition DVD players, game consoles and Internet set-top boxes, Hastings said. He called the company’s partnership with LG Electronics to deliver streamed movies through LG set-top boxes later this year the first of several partnerships.

Hastings said Netflix’s movie rental site, with its millions of customer ratings and reviews, is the “perfect Web site for streaming movies.” He noted earlier in the call that Netflix is continuing to invest in improvements in how it merchandises movies on the site. He predicted that Web video streaming would reach the mainstream this year.

Still, the company believes the shift to Internet-delivered movies will be a long one.

“It will take years for [Internet TV] devices to reach critical mass,” said Barry McCarthy, Netflix chief financial officer.

Hastings said a bigger competitor right now is Redbox, a company that offers $1 overnight DVD rentals through kiosks at grocery and other stores. However, he said as Redbox grows, it could push more traditional video rental stores out of business, increasing the potential market for Netflix.