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Netflix: More Streaming Means Less Churn

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Netflix (s NFLX) had what could be its best quarter ever, and by all accounts it appears to be a direct result of the company’s Watch Instantly streaming service. Based on the company’s actual results, as well as comments from Netflix CEO Reed Hastings on the company’s first-quarter earnings call, it seems clear that the online video service is contributing positively on a number of fronts, including lower churn and lower subscriber acquisition costs.

Hastings said on the call that Netflix attributes this quarter’s record low churn to an increase in streaming. Moreover, the company’s investment in streaming titles, as well as the availability of the service across multiple devices and an improved user interface, is driving more subscriber additions through word of mouth, therefore lowering Netflix’s cost of adding new subscribers.

Over the last several months, Netflix has been striking deals with Hollywood studios like Warner Bros. (s TWX), Fox (s NWS), Universal (s GE) and now HBO, in which it agrees to a 28-day window before it can rent DVD releases by mail, and in return receives discounts on DVDs. The company then pours those savings into licensing more content for its streaming service. Some subscribers have complained about the lack of new releases, but on a whole the strategy appears to be working for the company, as it continues to add new subscribers at record levels.

More tidbits from the earnings call:

  • The biggest competitor Netflix sees isn’t Redbox (s CSTR) kiosks or on-demand services from Amazon, Vudu or other, but comes from improved service offerings from traditional pay TV distributors. “There are a lot of competitive threats… But cable, satellite, and telcos improving their products is probably the biggest threat,” Hastings said.
  • Based on rumors that Hulu could enter the market with a subscription service offering, Hastings said it too could pose competition to Netflix’s streaming service. However, it’s too early to tell how much of a threat Hulu might be. “We’ll see what they do,” Hasting said.
  • Netflix isn’t concerned about Redbox potentially entering the streaming market at a much lower price point than its own entry-level $9 a month subscription service: “Redbox does many things incredibly well, but we’re not worried about them as a streaming competitor,” Hastings said.
  • The reduction in average revenue per user (ARPU) generally doesn’t come from existing subscriber trading down to lower-priced subscription plans, but rather from the increase of new subscribers that are signing up to Netflix’s $9 a month plan. In fact, Netflix had more existing subscribers trade up during the quarter than it saw trade down, according to Netflix CFO Barry McCarthy.
  • For now, Netflix doesn’t see the Apple (s AAPL) iPad as a significant contributor to subscriber additions. “In the long term the iPad is a great device that has a lot of potential,” Hastings said. “But in the short term, when you compare it to the 30 million users that have a Wii, it’s not a huge contributor.”
  • Despite record additions and an increase in the number of users tuning in to its streaming service, Netflix is still seeing growth in its DVD-by-mail service. “Our DVD shipments continue to increase,” Hastings said. “DVD’s got a lot of legs.”

Related content on GigaOM Pro: Slow and Steady, Netflix Pulls Ahead in Streaming Video (subscription required)

4 Responses to “Netflix: More Streaming Means Less Churn”

  1. Ronald Hill

    I’d say that streaming is one of the main features that keeps me w/ Netflix. I’d hate having to wait disc-by-disc to complete a show, when the instant stream makes the whole thing available whenever I feel like it. Also, I think there’s less commitment when it comes to streaming than discs. With a disc, you feel like you have to get it back out the door as soon as possible otherwise you’re wasting money, whereas the instant stream only pressures you when a movie is about to expire.