Netflix Announces Q1 2005 Results

"Blockbuster is a formidable competitor," said Reed Hastings on the Q1 2005 Earnings call tonight. Hastings noted that Blockbuster's aggresive advertising, in-store coupons (he called them "creative"), in-store advertising, and willingness to spend heavily to compete did not slow Netflix's ability to add 945,000 new subscribers (compared to 750k for Blockbuster) for a total of 3,018.000. He also said that Netflix is still on track to hit 4 million subscribers this year.

Netflix revenue increased 154% over last year, and subscribers grew 56%, but they lost $8.8 million -- about half of the expected loss. Netflix expects another expensive quarter competing with Blockbuster before returning to profitability.

Interesting bits from the call:

Netflix sees the DVD-by-mail market as large as 20 million subsribers (other forecasts cited on the call range from 10-15 million)

Blockbuster will spend up to $400 million to hit 2 million subscribers, even with 20 million store-based customers. The cost to participate in this market is not trivial.

HD DVD will be huge in the coming years, giving longer life to DVD than expected.

Netflix still sees Video-on-Demand taking around 5 years -- the studios make too much money on DVD.

$9.99 one-out plan as profitable as $17.99 3-out plan, so Netflix will focus on giving customers choices at signup.

Subscriber acquisition cost was up slightly to $37.89 due to increased marketing costs.

Churn was 5%, up from 4.5%, due to competition.

Netflix expects to lose $5 - $15 million this fiscal year.

Household penetration was 9.8% in the Bay Area and 2.6% outside of the Bay Area.

Netflix noted that there was concern that Blockbuster was "underperforming their plan" in regards to bank loans.

When asked about Amazon, Hastings said, "Can't comment on discussions," but did note they are an important portal like Yahoo!, MSN, etc.

Lots of great coverage of the story:

Netflix Q1 2005 Earning Press Release
Thomas Hawk: Davis Freeberg on Today's Netflix Analyst Call
Yahoo! News -- Netflix Posts First-Quarter Loss
Video Business Online: Netflix Loss Lessens in First Quarter
Marketwatch: Netlix Loss Widens n Higher Expenses

Comments

[Charles]

"$9.99 one-out plan as profitable as $17.99 3-out plan"

As a matter of fact, according to my Netflix Fee Calculator:

http://frogcircus.org/netflix/

The one-out plan is more profitable than the 3-out plan (of course you also could have divided the price by the number of DVDs to determine that).

More interestingly, however, is the fact that if transit time between you and Netflix is a single day (as it presumably is for most customers), the 1-out plan actually allows you to rent 7 DVDs each month!

[REN]

You have to consider rental behavior as well. What about the renter that rents maybe 4 a month and has traditionally been on the 3-out plan. That person will eventually find his way to the 1-out plan giving Netflix less profit.

[BoyWonder]

While Netflix is growing quickly, how long did it take them to get to 500K customers? The answer is 9 quarters (more than 2 years)!!! Blockbuster took less than 4 months... Netflix talks a good game, but with a 5 year advantage, they should be running away. They don't get credit for beating Blockbuster in my book, because they should be!

In addition, why does Netflix talk so much about Blockbuster in their calls? If I'm in first place, why do I need to talk about the 2nd place guy?

[vn]

BoyWonder,
BB has the advantage that there is a business model and a market for online DVD rentals, thanks to Netflix. So you can't compare the two. You learn from the mistakes of the first mover. However, it is worrisome that BB spends so much money ($400m to acquire 2m customers) when the difference between the two should be marginal. BB may be overly aggressive hocking their future for short term "growth."

I too wish hastings would speak less about BBI. It makes him look like he obseses over it or something.

During the first several years Netflix was in business, very few people had DVD players. It would be hard to reach 750k customers in the first year if nobody had a DVD player. Wouldn't it?

[lv]

on friday nflx management offered more
optomistic comments about partnering
with Amazon or similiar portals.
seems like that IMDB would be a great
marketing vehicle for netflix.
netfix would save alot of money.

[KirkH]

HD DVD isn't going to be huge. Expensive new players, consumer confusion, and a lack of HDTVs will all contribute to the rise of video on demand.

I watched Collateral in HD the other day with VOD from Time Warner. By the time HDDVD players are around and cheap HDVOD will be much more common.

[BoyWonder]

"During the first several years Netflix was in business, very few people had DVD players. It would be hard to reach 750k customers in the first year if nobody had a DVD player. Wouldn't it?"

Of course. In 2000, 13M people had DVD players. In 2004, 72M had them. Netflix had 292K customers in 2000 and 2.6M in 2004. So they basically inched from 2 to 3.5% penetration with no competition. Blockbuster went from zero presence online to 1% penetration in 6 months. They might be spending like crazy (more on that in a second), but it is working.

"it is worrisome that BB spends so much money ($400m to acquire 2m customers) when the difference between the two should be marginal."

Netflix lost $100M+ before they made a profit, which took 3 years (2000-2002). That's Operating Losses, not just spending. They spent $371M to make $265M over that time. And that was to just get to 850K customers... My math works out to be $436 per sub, while Blockbuster spending $400M to get to 2M works out to be $200... And Netflix didn't have a single competitor of note.

[BoyWonder]

"During the first several years Netflix was in business, very few people had DVD players. It would be hard to reach 750k customers in the first year if nobody had a DVD player. Wouldn't it?"

Of course. In 2000, 13M people had DVD players. In 2004, 72M had them. Netflix had 292K customers in 2000 and 2.6M in 2004. So they basically inched from 2 to 3.5% penetration with no competition. Blockbuster went from zero presence online to 1% penetration in 6 months. They might be spending like crazy (more on that in a second), but it is working.

"it is worrisome that BB spends so much money ($400m to acquire 2m customers) when the difference between the two should be marginal."

Netflix lost $100M+ before they made a profit, which took 3 years (2000-2002). That's Operating Losses, not just spending. They spent $371M to make $265M over that time. And that was to just get to 850K customers... My math works out to be $436 per sub, while Blockbuster spending $400M to get to 2M works out to be $200... And Netflix didn't have a single competitor of note.

[manuel]

"1-out plan actually allows you to rent 7 DVDs each month!"

Frogcircus.com doesn't take throttling into consideration. This calculator does:

http://www.manuelsweb.com/netflixcalculator.htm

Manuel's calculator uses the "Crazy Algorithm" to predict one's rental experience.

Ah, Manuel the cartoon-watching-male-nurse...

[Charles]

While I did experience throttling in the past, I no longer do. Lately I have been sent a new DVD every day, without fail, with no sign of slowdown, even if I return each DVD immediately, for weeks on end.

You guys, Maual is a BBI Fanboi we all know that by know. Fanboi for BBI is manual, I bet he gets a check from them every month.

omg.. I just went to manuels website link and he is a total fanboi of Blockbuster or something. He is a Netflix hater for sure. F^%$ that fanboi manuel, think for yourself and know that Netflix is the premium service for sure. Netflix is for those wheo are smater, everyone knows that.

Yu can be "smater" if you want but NF does nothing for me right now. I cancelled after 2 years. 18 months were great then last summer, throttling kicked in. Shipping tomorrow became standard. 2-3 days to get and 4-6 days to return. add that to NO weekend work and no USPS scanning and the suck right now. Hopefully they will improve and see that that stuff is a lost cause and return the service back were it was. Hell, in 2 years I never got 1-day service and usually not 2-day. I'm still waiting for a center closer to me than 300 miles.

[exf]

netflix will open another half dozen
patented smart hubs in '05. they
just said 90% of customers are
within overnite range. thankfully
i am one of them. last week--
returned monday, new ones wednesday.

exf,

I would try them again if this comes true. I would take even 2-day delivery each way but I can't stand the 6-10 total days (not counting the "watch/view" time) that I was getting in the "end"! (pun intended!)

[xx]

i too wish hastings would speak less about BBI. It makes him look like he obseses over it or something

that because BBI attack is the number one
issue that muddy's netflix performance.
otherwise they have flying colors.
what i dont get is why didnt Netflix
realize sooner that BB was major threat.
Well attacks like this happen every day.
Jetblue was voted favorite airline
by customers many times, so what happens
AMR-DELTA-others running scared, cut
ticket prices to attack Jetblue and shut it
down. Netflix has a better chance cause
its only dealing with one SHARK.

[Doctor Metal]

I'm sorry, but Manuel is right on the money. That doesn't mean I've given up my 5-at-a-time plan, but I'm cognizant of their throttling policy and so I know what to expect and how to maximize my rentals/month.

I'm a fan of Netflix and am a customer, but they do take steps to try and stop customers from renting a lot of DVDs from them, and I think they should be more upfront about that.

I don't see why acknowledging what's really going on makes me a hater or a Blockbuster fanboy (I think their service sucks). Netflix is the best there is now, but they do screw with people.

[gina Sims]

what did i get on math A regent in 2005