We always come back time and time again to Netflix for the simple reasons that it began a digital entertainment genre ‘ postal rental of DVDs ordered online ‘ and it will only falter when online sales of video content begin to become mainstream, as such it is a great indicator of what’s happening in online video.
At the Netflix quarterly results this week the company said that it grew 25% in terms of subscribers over this time last year, but only grew revenues by 11% to $337.6 million and net income hardly at all up to $26 million from $25.6 million last year.
What appears to have happened is something of a success for the Netflix online strategy, though it may be something of a poisoned chalice. In effect since it has launched its online film service in the US, churn has fallen.
Churn is down slightly and the cost of finding new subscribers is also down ‘ we see these both being driven by that new online film service ‘ free to existing subscribers of the DVD rental service.
Churn for the second quarter was 4.2%, compared to 4.6% a year ago and just 3.9% in the first quarter. Subscriber acquisition cost was $28.95 for each gross subscriber added, compared to $44.02 for the same period of 2007 and $29.50 for the first quarter of 2008. This is where the big numbers have changed for Netflix, which for the last two quarters has saved $15 a head for each subscriber it has attracted, while losing less existing customers.
The service where Netflix allows subscribers to streaming video directly to their TVs through its new Netflix Player by Roku and its deal with Microsoft to embed Netflix streaming in the Xbox 360 console were cited as strong reasons for the improvement.
But if the online DVD community is so keen on an online service, then when other online services begin to take shape and build up a subscriber base, then services such as Amazon and iTunes will make dents in Netflix, although they don’t at present.
Netflix ended the quarter with 8.4 million subscribers up from 6.7 million a year earlier, but many of these additions came last quarter. Gross subscriber additions for second quarter were 1,384,000, up 35% from 1,028,000 in the second quarter of 2007 but substantially down from the 1,862,000 gross additions in the first quarter. This led to net subscriber change being an increase of 168,000, compared to a decrease of 55,000 for the same period of 2007 and an increase of 764,000 for the first quarter of 2008.
Netflix stuck with its guidance for the year, saying it would end 2008 with 9.1 million to 9.7 million subscribers, revenues of $1.36 billion to $1.38 billion, and net income between $75 million to $83 million.