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Netflix Streaming Rebounds In Q4, DVD Service Drops 2.8M Subs

After a customer backlash that caught it off guard, Netflix fared better than it expected on the Internet video front in the fourth quarter of 2011, adding 220,000 U.S. streaming-only subscribers -- while it shed 2.76 million DVD-by-mail customers in the period.

However, Netflix's reported increase in U.S. streaming users was due to consumers who signed up for a free trial subscription in the last three months of 2011. Netflix actually lost a net 358,000 paid streaming subscribers in the U.S. in the fourth quarter, while those on free subscriptions jumped 62% sequentially to 1.52 million.

The company in the third quarter of 2011 lost a higher-than-expected 800,000 U.S. subscribers, a setback that came after Netflix split apart DVD and streaming plans. That increased monthly fees for many customers as much as 60%.

In the fourth quarter, Netflix's total unique U.S. subscribers increased 610,000, to 24.4 million total. At year-end Netflix had 21.67 million streaming subs (up from 21.45 million the previous quarter) and 11.17 million DVD customers (versus 13.93 million in Q3).

"We are encouraged by the strength in acquisition that we are seeing, coupled with continued improvements in retention among our domestic streaming members," Netflix CEO Reed Hastings and chief financial officer David Wells wrote in a letter to shareholders.

Netflix shares climbed more than 13% in after-hours trading Wednesday, to $108 per share.

Streaming customers watched more than 2 billion hours of Netflix streaming video in Q4, or approximately 30 hours per member per month on average, according to the company.

The Netflix executives again downplayed the end of its deal with Starz Entertainment, which expires at the end of February.

"[W]e have plenty of substitutes and in many cases have already directly relicensed from the studios some of the top performing Encore titles," they wrote. "So, the only significant loss is the current 15 Disney output titles, such as Toy Story 3 and Tangled, which currently constitute about 2% of our domestic viewing."

The company posted fourth-quarter revenue of $876 million (up 47% from the year-earlier period) and a net profit of $41 million -- a year-over-year decline of 13%.

For the current quarter, Netflix projects that it will be in the red, with a net loss of between $9 million and $27 million, with company citing investment in international markets (particularly the U.K.). The company previously has said that expects to post a net loss for full-year 2012.

While DVD members declined sharply over the last two quarters, the executives wrote, "the weekly rate of DVD cancellations has subsided from peak levels in September." In 2012, Netflix expects "continued attrition" on DVD plans, forecasting a net loss of approximately 1.5 million DVD subscribers in the current quarter.

Netflix said in Q1 2012 to date, U.S. net additions for streaming are tracking close to its total net adds in Q1 2010 of 1.7 million. The company expects to end the first quarter with 22.8 million to 23.6 million streaming subs, and 9.4 million to 10.0 million DVD customers.

Internationally, Netflix added 380,000 customers, standing at 1.86 million at the end of the year (those subscribers are all streaming-only, as the company does not offer DVDs-by-mail services outside the U.S.). It anticipates having 1.9 million to 2.45 million at the end of Q1 2012.

Netflix views itself as "just another network competing for viewing time with, and licensing content from, other networks," Hastings and Wells said: "As cable networks developed, they were able to both compete with broadcast networks, and to bolster broadcast networks economics through syndication. Today it is accepted practice for networks to license parts of their content to other networks, if they get paid well enough. That is the world of content licensing in which we live."

Last week, Netflix announced that Leslie Kilgore -- its chief marketing officer for 12 years -- will no longer serve as CMO but will join the company's board as a non-executive director. The movie-rental company appointed Jessie Becker, previously vice president of marketing, as interim CMO while it searches for a permanent replacement.