Netflix's Profit Jumps,
Plans to Cut Monthly Fee
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
October 15, 2004; Page A11
Netflix Inc.'s profit and sales surged in the third quarter as the online DVD rental company continued to add new subscribers at a rapid clip.
The Los Gatos, Calif., company said it plans to lower the monthly fee for its unlimited DVD rentals to $18 from $22 starting in November. The company had hiked prices earlier this year.
In a move to blunt the expected entry of Amazon.com Inc. into the business of renting DVD movies by mail, Netflix said it's slashing its subscription prices and postponing a plan to expand overseas so it can focus on a coming battle with the Internet retail giant in the U.S.
Shares plunged on the news, down 40% to $10.51 in early morning trading Friday on the Nasdaq Stock Market.
In an interview, Netflix Chief Executive Reed Hastings said the company has heard from "several sources" he declined to identify that Amazon is preparing to enter Netflix's business, through which customers pay a flat monthly fee, order DVDs online and receive them through the mail. As a result of Amazon's expected moves, Mr. Hastings said Netflix is cutting its monthly subscription fee to $18 from $22 and shelving plans to expand its service to the United Kingdom. Mr. Hastings, who also discussed the plans in a conference call with investors, said the changes are an effort to gain more subscribers before Amazon gets into the market.
The price drop is a reversal of past actions by Netflix, which increased its subscription fee earlier this year to $22 from $20 even as Wal-Mart Stores Inc. and Blockbuster Inc. got into the DVD-by-mail market. "Amazon is a more serious competitor," Mr. Hastings said. "They're the gold standard in e-commerce. We take the threat seriously."
Patty Smith, a spokeswoman for Amazon of Seattle, said the company's "customers have encouraged us to offer low-price online DVD rentals but we have nothing to announce at this time." Amazon already has a sizable audience of customers who purchase DVDs through its Web site.
For the third quarter, Netflix reported net income of $18.9 million, or 29 cents a share, compared with net income of $3.3 million, or five cents a share, in the same quarter last year. Revenue nearly doubled to $141.6 million from $72.2 million in the year-earlier period.
Results beat the company's own raised forecast. Earlier this month, Netflix raised its guidance, saying net income could reach as high as $17.5 million. At the time, it said its subscribers in the period were up 73% from a year ago to 2.23 million total subscribers.
However, Wall Street was expecting even higher earnings. Analysts surveyed by Thomson First Call were expecting a profit of 32 cents a share on revenue of $140.6 million.
When the company raised its guidance earlier this month, it attributed the brighter outlook in part to lower-than-expected movie rentals in the quarter, which may have resulted from interest in the Olympic games. Since Netflix customers are allowed to rent an unlimited number of movies for a monthly fee, fewer movie rentals means lower expenses.
At the time, Netflix also announced plans to change how it accounts for its back-catalogue DVD library. Without those changes, earnings would have been $14.9 million or 23 cents a share, the company said Thursday.
Netflix has enjoyed surging revenue growth as its subscriber base soars. Still, the company has paid dearly in costly marketing tactics to recruit customers, which weighed heavily on profitability until recently.
--Wall Street Journal reporter Nick Wingfield contributed to this article.
Write to the Online Journal's editors at newseditors@wsj.com
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