Netflix, master of DVD rentals, will expand streaming video business

What does Netflix Inc. (NFLX), the company that mastered home delivery of DVDs, have next up its corporate sleeve? Chief Executive Reed Hastings was coy during the company's third-quarter earnings conference call Thursday. But he did make it clear that Netflix would start streaming video on another device in addition to Microsoft Corp.'s (MSFT) Xbox gaming console, a service that began a year ago.

Hastings said Netflix intends to partner with a consumer-electronics firm later this year that has a "material installed base," i.e., a computing system already in use. To some that may mean a link-up using Sony Corp.'s (SNE) PlayStation 3 or Nintendo Ltd.'s (NTDOY) Wii. UBS Analyst Brian Fitzgerald said as much in a note to investors, telling them to expect a fourth-quarter launch of another gaming console.

Update: Sony and Netflix announced late Sunday that PlayStation 3 users in the United States will have access to streaming movies and other video beginning next month at no additional cost.

Hastings also noted during the call with analysts following the earnings announcement that Netflix has an exclusive deal to distribute content on the Xbox. Still, the new partner is one large enough to give the company confidence to raise fourth-quarter earnings guidance due to lower costs associated with acquiring new subscribers.

The likely deal surfaces as more Netflix subscribers are choosing to stream content, resulting in a 145 percent increase in streamed video in the third quarter. Hastings said 42 percent of Netflix subscribers streamed at least 15 minutes of one TV episode or movie during the third quarter.

Other highlights of the investor call:

  • Netflix plans to expands video streaming internationally starting next spring. Hastings said the overseas initiative would start small and wouldn't involve physical distribution of DVDs. While the latter would certainly be possible, he said, "postal systems in many nations make that tricky."
  • Hastings seemingly sided with Hollywood movie studios' efforts to limit new movie releases to sales only. That's because they view upstart Redbox, an automated DVD rental system that rents movies for $1 a day, as eating into studio profits by discouraging purchases of newly released DVDs. Hastings said Netflix's business is "less dependent on new releases than our DVD-based competitors," and believes that it could benefit from a short sales-only window, allowing Netflix to spend less on discs and more on streaming content.
  • Hastings also said Netflix has begun Saturday shipping at all of its 58 distribution centers and continues to work on automating the distribution process. Netflix will soon place a roughly $40 million order for automated rental return machines that can accept, clean, inspect and prepare returned DVDs for reshipment. The machines will cut costs and improve service, he said.
The conference call followed a stellar earnings report earlier in the day. Netflix reported third-quarter earnings above analyst expectations, driven by 28 percent growth in subscribers. Revenues rose by about 24 percent from a year ago to $423.1 million, and profit jumped 48 percent to $30.1 million, or 52 cents a share. Investors loved the results, sending shares nearly 11 percent higher in Friday trading, to end the week at $54.89 a share.
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