Netflix keeps its faith in DVDs, but looks ahead to VoD

By-mail movie rental pioneer Netflix posted its fourth quarter earnings, with favorable results. But in its quarterly conference call, the company gave DVD about five more years before it ceases to be the dominant format.

Netflix posted its fourth quarter results, with 9.1% annual growth in revenue, 6.2% growth in net income on lower subscriber-acquisition costs, and 18% increase in subscriptions over the same quarter in 2006.

However, the company predicts less growth in 2008, due to Blockbuster's dynamic position and the gradual changes taking place in the market.

Netflix ended 2007 with 7.48 million subscribers, a number not only higher than the previous year, but almost higher than guidance had anticipated. Reed Hastings, CEO of Netflix, said during the company's quarterly earnings call that it enjoyed a modest jump in fourth quarter subscriptions when Blockbuster's Total Access raised its price from $17.99 to $19.99.

Hastings said that while that was a sign Blockbuster had shifted to valuing profit over growth, the company could change its mind again at any time. It should not be discounted as a competitor, because Blockbuster still draws customers away from Netflix despite posting large losses, and losing power in its marketing efforts.

Netflix does not regard cable and Internet-based video-on-demand as a material short-term threat to the DVD rental business, since DVDs have the advantage of content ubiquity, player ubiquity, an earlier window for new releases than on-demand formats, and generally lower prices.

"DVD is simple, cheap, and ubiquitous," Hastings declared.

However, despite being confident that DVD spending will continue to grow in the next five years, he acknowledged that Netflix will have to shift its focus on the nascent downloadable content market, which the company believes will eventually come to replace DVDs.

The company has been incrementally investing in its online content delivery over the last three years, and 2007 saw a tripling of content available for download. Last week, the company began offering a package of unlimited streaming and DVD rentals for one price; this unlimited subscription model is one of the reasons why Netflix has been so successful thus far.

"We've grown earnings over the past three years and expect to do that in 2008 and beyond," the CEO remarked, "while positioning ourselves to fully capitalize on Internet delivery as it gains critical mass."