Netflix strategy focuses on subscriptions

Company reported 3.8% increase in Q2 profit

Netflix's strategy will remain focused on subscriptions even in the digital space, CEO Reed Hastings emphasized Friday.

"We don't plan to enter the pay-per-view segment, where Apple, Amazon, Sony and others focus, or the ad-supported segment, where Hulu, YouTube and others compete," he said Friday during the company's second-quarter earnings call. "Both of those segments will likely be substantial, but our subscription segment will also be large and will provide Netflix plenty of room for growth."

He predicted that the firm's free streaming offers would strengthen its appeal with subscribers. And he projected that Netflix's core DVD-by-mail segment would continue expanding for five to 10 years even as the DVD business slows down.

Los Gatos, Calif.-based Netflix reported a better- than-expected second-quarter profit, possibly easing some concerns that higher costs for its digital expansion could drag down financials. The company reported a 3.8% increase in second-quarter profit to $26.6 million. Revenue rose 11% over the year-ago quarter to $337.6 million.

Netflix added 168,000 net new subscribers in the latest quarter to boost its overall user base to 8.4 million. That compared with a decline of 55,000 a year ago.

Subscriber acquisition costs hit a record low of $28.95 on average, compared with $44.02 in the year-ago period.

Still, Jefferies & Co. analyst Youssef Squali said he'd stay "on the sidelines for now" because of a lack of true "visibility into the investments/economics of the digital platform."

Wedbush Morgan analyst Michael Pachter, though, predicted that "Netflix is positioned for dramatic (profit) growth in 2008 and 2009 as streaming adoption increases."

Management maintained its year-end subscriber guidance of 9.1 million-9.7 million.

Netflix shares rose 4.2% to $27.85.
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