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Friday, June 17, 2005

Netflix discusses downloadable movies (NFLX)

Barry McCarthy, CFO of online movie rental company Netflix (ticker: NFLX), presented at the Morgan Stanley Small Cap Conference on June 15th. (That means that Morgan Stanley hosted small cap companies, not that Morgan Stanley is becoming a small cap stock...) Here's his argument why DVD rentals will not be displaced by movie downloading:

The studios make all of their money selling DVDs and almost none of their money theatrically. And they make practically no money at all on pay-per-view...

So, if you're a studio and you're trying to decide whether you're going to license content for electronic downloading, the decision is pretty simple. Two bucks electronic downloading, 18 bucks wholesale. Before you're going to license content for electronic downloading, you have believe that the market at two bucks of incremental revenue is so elastic that it's going to overwhelm the revenues you already generate from DVD and grow your business.

And no CEO is going to make that bet, which is why there's virtually no content licensable, on a subscription basis, for downloading. And that's the reason downloading is not the technology of the 21st century. Technology can do it. There will be a box in your home, that you can afford, that's going to drive that technology to the TV set. And there will be consumer demand for it. But there will not be content for it; not in abundance. And so that concept, I think, is DOA.

What is on the horizon is HDVD.

(Quotes are from the CCBN StreetEvents transcript.)

NFLX chart below.

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Posted by David Jackson on June 17, 2005 at 12:28 AM in Conf call quotes, Sub-sector: E-tailing, Sub-sector: Services, ticker: NFLX | Permalink


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I won't pretend to be an expert on this but I wonder if the studios may be forced into doing this? To wit: napster. Once the public starts clamoring, all it would take is for one studio to test the waters and the flood gates will open. Those at the top, understandably, want to protect their investments, but those at the bottom will pursue revenues MUCH more vigorously IMO. The reason Net Flix is so popular is the convenience factor-- that's it! What would be more convenient then on demand. Also, by Mr. McCarthy's rationale, it wouldn't make any sense for the studios to licenses video to rental companies either if they could just monopolize the market for wholesale.

Posted by: mfairview | June 17, 2005 08:22 AM

The HDTV dvd data size of 30 gigs+ will also negatively impact VOD.

Posted by: k1tfk | June 17, 2005 09:29 AM

The CFO's logic is extermely dubious. First off, studios do not get $18 "wholesale" for a DVD. Give me a break! Secondly, getting $2 per view on demand is a LOT better than getting $ZERO for each time someone rents a movie from Netflix. Those comments are completley assinine.

Posted by: Jason | June 17, 2005 03:11 PM

Does anybody know how and how much NetFlix pays to the content prorviders, studios?

Posted by: Sam | June 18, 2005 10:47 AM

I guess I don't know but I assumed it was like any other rental business-- i.e. $0. They buy the DVD and own the DVD and rent it out. At least, this is the way it was in the VHS days when my parents owned a video store. There was no licensing to be paid.

Posted by: Jason | June 18, 2005 12:34 PM

as low as $14.50 for dvd...? ( a guess...hard to find data).
Dont know revenue sharing but you might be able to back it out if you can get other numbers.

Posted by: k1tfk | June 19, 2005 08:07 AM

I think the answer to Sam's question is it depends on the title or, more likely, the studio. From their most recent 10-K:

"We acquire DVDs from studios and distributors through either direct purchases or revenue sharing agreements."


I have read that the acquisition method effects the way Netflix markets titles, (i.e. they have more incentive to push certain titles through their recommendation engine, etc.) which may explain why their recommendations seem to be so poor.

Posted by: phaser21 | June 24, 2005 09:30 AM

Very interesting, Phase21... But these revenue sharing agreements would make it CHEAPER for Blockbuster or another major chain to purchase the movies, not more expensive, right? Because correct me if I'm wrong, but there's nothing to stop them from buying the DVD at retail for $15. Any agreements that they have must allow them to get individual titles for less than $15, not more, correct? There's no way the STUDIO could get $18 out of a number that's less than $15.

Posted by: Jason | June 24, 2005 05:27 PM

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