November 22, 2010 / 2:03 PM / 7 years ago

Netflix offers stream-only service, hikes prices

NEW YORK (Reuters) - Netflix Inc will offer its first unlimited streaming-only subscription plan in the United States and raise prices on some of its other streaming and DVD plans, which accelerates the company’s move away from its DVD-by-mail business.

<p>Netflix CEO Reed Hastings speaks during the unveiling of the iPhone 4 by Apple CEO Steve Jobs at the Apple Worldwide Developers Conference in San Francisco, California in this June 7, 2010 file photo. REUTERS/Robert Galbraith</p>

Netflix shares rose 7.7 percent to $186.44 on the Nasdaq.

The move helps Netflix’s efforts to eventually phase out sending DVDs by mail, said Gabelli & Company analyst Brett Harriss.

“For a while, the goal of the company was to change its business model from DVDs to streaming because it recognizes the DVD has a limited shelf life at this time and streaming has higher margins,” Harriss said.

The company said on Monday the streaming plan will be available immediately. As for the price increases, new subscribers will have to pay them right away, while current members will start paying higher fees in January.

The streaming plan will cost $7.99 a month and the prices for the 1-DVD and 2-DVDs out at a time plans will rise by $1. The 3 DVDs-plan will jump $3 to $19.99, which Wedbush Securities analyst Michael Pachter said will turn away hundreds of thousands of subscribers.

“The gain Netflix gets from people who don’t want a disc at all is offset by a number of people who will quit because of higher pricing,” he said.

Pachter added that Netflix’s new plans will “have less of a beneficial impact than the Street is saying,” referring to the 7 percent jump in Netflix shares on Monday.

PRICEY PROPOSITION?

Netflix, which gained success as a DVD rent-by-mail service, ended the third quarter with 16.9 million members in the United States and Canada. It launched its first streaming-only service in Canada in September.

Its streaming video library is still tiny compared with its DVD by-mail selection and Harriss said the company would have to continue spending on expensive content deals to boost its digital offerings.

Netflix already has pricey partnerships with EPIX pay TV channel, estimated at $1 billion, and NBC Universal, a unit of General Electric Co.

Netflix’s gross margins fell to 37.7 percent in the third quarter from 39.4 percent in the second quarter.

Chief Executive Reed Hastings has said he would like to keep long-term gross margins be between 30 percent and 35 percent.

Netflix has undergone stellar growth since its 1999 debut. Its shares have gained many-fold since a 2002 IPO.

Known for its signature red envelopes for mail-in DVD rentals, Netflix’s content is now streamed on a host of devices, ranging from smartphones, video game consoles to connected TVs.

In late October, the company expects to generate $586 million to $598 million in revenue in the fourth quarter.

The Los Gatos, California-based Netflix competes against companies such as Hulu, Coinstar Inc’s Redbox and Amazon.com Inc.

Hulu’s paid service, Hulu Plus, officially launched its subscription plan last week at $7.99 a month, two dollars less than it previously announced and on par with Neflix new streaming plan.

Reporting by Liana B. Baker; editing by Gerald E. McCormick, Maureen Bavdek and Andre Grenon

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