Streaming Is Driving New Subscriber Growth At Netflix

Netflix is betting its future business on streaming movies and TV shows over the Internet, and so far that bet is paying off nicely. Just last November, it introduced a streaming-only subscription for $7.99 a month, and that helped drive subscriber growth up 63 percent last quarter to end the year with 20 million subscribers. “More than one third of new subscribers are signing up for the pure streaming plan,” Netflix reports in a letter to shareholders (PDF and embedded below). And it expects that percentage to keep growing.

Netflix added 7.7 million net new subscribers total last year, up from 2.9 million in 2009. The growing appeal of streaming should keep driving that number up. And Netflix is spending less to attract new customers. While new subscribers grew 63 percent, Netflix spent 10 percent less on marketing. Its average cost to acquire anew subscriber fell to $11.13 in the quarter, from $19.81 during the September quarter before pure streaming was an option. Also, a lot more people are taking advantage of Netflix’s free one month trial to see if streaming is for them. Nearly 9 percent of subscribers were in free trials during the quarter, up from about 6 percent the quarter before (and 3 percent a year ago).

Netflix also addressed the fears it is stirring among some media companies that streaming will compete with cable. But it offers the example of one of its content partners, Starz, to show that streaming does not necessarily have to cannibalize other sources of revenue. It also calls out HBO for not licensing its shows to Netflix. In the letter, Netflix notes:

Some content owners fear that licensing to Netflix will undercut other, larger profit streams. The Starz example suggests otherwise. We have carried Starz since October 2008 and we have not licensed HBO. Over that time, Starz’ Multichannel Video Programming Distributor (MVPD) subscriber count has grown, and HBO’s has not. At a more granular level, the Starz Original “Spartacus” was available at the same time on Netflix as on MVPD, and it was a big success in MVPD viewing, as shown by its Nielsen ratings. Even the DVD box sets have been a great success. So having content on Netflix does not appear to materially harm the revenue of that content on other channels. In other words, the evidence is pretty clear that content that is also licensed to Netflix generates more money for its owners than content that is withheld from Netflix.

Stepping back, some consternation about Netflix success is natural. Like the rise of the Fox broadcast network 20 years ago, a new entrant bids up the price of content, and the incumbent aggregators are not pleased. Netflix is good for consumers, good for content producers, and is one more competitor for existing aggregators. Many of the major media companies are part content producer, and part aggregator, which leads to Netflix being a frequent topic of discussion.

If Netflix keeps adding new streaming subscribers at the rate it did in the fourth quarter, it will become an even more frequent topic of discussion in both living rooms and media company board rooms.

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