Netflix Has 7% of Americans Subscribing For Home Movie Delivery: More Than Any US Cable Company

This post is comprised of two articles. The first is by Julianne Pepitone of CNN/Money and describes Netflix's extradordinary achievement of signing 7% of the US population,more than any of the US cable TV providers. The second article, by Michael Cieply of the New York Times, discusses the dispute within the entertainment/movie business about plans to follow the market and release movies earlier than has been done historically rather than hold them first for theater release.

This suggests two developments: the first is that the cost of going out to the movies, a staple of family fun for almost a century has now become too expensive. For a family of four, the price of tickets, popcorn and parking can be $70. Throw in a babysitter for younger children and the $100 line is crossed. Secondly, the improvement and declining cost of high quality, big screen TVs with good audio systems and internet downloads now makes the decision about whether to go out or stay in much more of a toss-up. There are concerns that this will contribute to the fractionalization of society, especially given the decline of voting rates, closing shopping malls and other forms of social engagement. It is probable that the human need to interact will never entirely disappear, but going to the movies may no longer be one of the outlets for that urge:

Julianne Pepitone, CNN/Money:

"Netflix knocked over a new milestone Monday: It now has more subscribers than the largest cable TV operator in the U.S.

Netflix's global subscriber base grew almost 70% over the past year, to 23.6 million users. With that audience, it dethroned Comcast (CMCSA, Fortune 500) as the country's biggest provider of subscription video content. More than 7% of Americans now subscribe to Netflix.

Those details came out Monday in Netflix's (NFLX) first-quarter report, in which the company reported earnings of of $60.2 million, or $1.11 a share. That's up from $32 million, or 59 cents a share, a year ago.

Revenue rose 46% to $719 million. Both figures topped Wall Street estimates, but shares fell 2.5% in after-hours trade on light forecasts for the second quarter.

Netflix said it expects earnings of 93 cents to $1.15 a share for the second quarter, lower than analysts' forecasts. When you're a giant, growth gets harder.

Netflix said in its release that it expects subscriber growth to continue at a rapid clip for the rest of the year, but it warned that year-ago comparisons will get tougher in the coming quarters.

The release also noted the emergence of new, competing services Hulu Plus Amazon (AMZN, Fortune 500) Prime.

More content: Netflix is hoping to combat increased competition with more unique content. Last month, the company announced it had bought its first original show: "House of Cards," featuring Kevin Spacey.

"This represents slightly greater creative risk than we've taken in the past, but we think it's reasonable given the popularity of the original BBC show," Netflix said Monday in a "letter to shareholders" released alongside its earnings report.

Netflix will consider the buy a success "if 'House of Cards' is popular enough on Netflix so that the fee we've paid is in line with that of other equally popular content on Netflix at the time," Hastings wrote in the letter.

The company said it hopes to "license two or three similar, but smaller deals" in the future.

Netflix has also brokered deals with networks and studios. In its earnings release, the company admitted its recent deal with CBS "includes only a few on-air shows at present" -- but it also makes Netflix the only online subscription service to offer shows from all four broadcast networks.

International concerns: Netflix launched in Canada late last year, and it ended the first quarter of 2011 with about 800,000 Canadian subscribers -- lower than the company had forecast.

"We are still learning the seasonality curve and nuances specific to Canada," Netflix said in its release.

The company had previously said it expected $50 million in operating losses in the second half of the year for the international sector. Now, it forecasts $50 to $70 million in losses -- "which we are comfortable with given the size of the opportunity."

On a post-earnings conference call, many analysts' questions revolved around the situation in Canada. Hastings shrugged off most of the queries, saying "it takes time" to develop accurate data and forecast correctly in a new region.

Hastings also said developing apps for Google's (GOOG, Fortune 500) Android operating system is "a big priority," but he wouldn't comment further on a timeline.

Michael Cieply in the New York Times:

"Hollywood is picking sides for its first all-out brawl since its writers’ labor feud in 2007. And oddly, Christopher J. Dodd, once a powerful senator from Connecticut and now the film studios’ chief spokesman, has mostly been out of the fray.

The blow-up is between studios and theater owners over a plan to slip some movies into homes through on-demand video shortly after they arrive in theaters. For Mr. Dodd, the new chairman of the Motion Picture Association of America, it is the first industry crisis since he started in late March.

“I’m the new kid on the block,” Mr. Dodd said in an interview by phone on Friday, acknowledging that both his relative inexperience and the need to stay out of business decisions made by individual studios had kept him largely out of the battle. “Each company has to make up its own mind.”

Studios, exhibitors and filmmakers are arguing about the future of the business, and whether people in coming years will be more likely to watch movies in theaters or in increasingly sophisticated home setups mimicking the quality, immediacy and, perhaps, cost, of today’s theatrical experience.

Last week, four studios — Sony Pictures Entertainment, 20th Century Fox, Universal Pictures, and Warner Brothers — took the first step in their arrangement with DirecTV to release films two months after their theatrical release.

The first premium on-demand offering came on Thursday, as DirecTV offered Sony’s “Just Go With It,” with Jennifer Aniston and Adam Sandler, for $30. Two dozen filmmakers, including James Cameron and Peter Jackson, fired back with an open letter criticizing the experiment as a threat to theaters.

The fight separated allies who had recently joined to spend billions of dollars to upgrade theaters for digital and 3-D projection, and had used their combined political might to thwart proposed trading in a financial exchange based on box office revenue.

The rift underscores how little Mr. Dodd or anyone else can do to buffer the jolts in a film business where the greatest challenges are not the labor disputes or public policy battles that were wrangled by past Hollywood statesmen like the MCA chairman Lew R. Wasserman or the long-serving M.P.A.A. chief Jack Valenti.

Rather, the greatest challenges are philosophical and include business choices largely outside the reach of a trade association, which is limited by antitrust law from interfering in decisions that are really about business rather than public policy — hence Mr. Dodd’s unaccustomed restraint. In fact, the difficulties facing the industry are likely to become tougher as film companies feel their way toward a digital future that is only beginning to unfold.

“What’s really going on is that the architecture of the industry is changing,” said Jeff Berg, chairman of the International Creative Management agency.

Speaking by telephone last week, Mr. Berg predicted increasingly rapid waves of change that would overtake the movie business, as companies struggle to replace disappearing DVD revenue with income from both digitally enhanced theaters and new approaches, like so-called digital lockers, that will allow viewers to store films they have paid for in a pirate-proof virtual space that permits repeat viewing.

“There’s a big narrative that’s going to be very disruptive,” Mr. Berg said.

The fierce response by executives from big movie chains like Cinemark, AMC and Regal to the studios’ relatively cautious step with on-demand is clearly more about setting a line for future battles than it is about losing money from an Adam Sandler comedy that left most theaters weeks ago.

“I have not felt this level of concern about a practice of the studios among our members,” said John Fithian, president of the National Association of Theater Owners, which helped organize the filmmakers’ protest letter (in keeping with that association’s view that it can to some extent oppose the plan without violating the antitrust laws that have held back the M.P.A.A.).

Mr. Fithian, also speaking last week, said theater owners had been particularly shocked about the way they learned of the on-demand program: while they were gathered last month at the CinemaCon movie convention in Las Vegas, shortly after Mr. Dodd delivered an address voicing enthusiasm for the moviegoing experience. The report appeared on the Web site of the trade publication Variety.

“It came as a significant surprise,” said Mr. Fithian — though he acknowledged that his organization had opposed a years-long battle by the association Mr. Dodd now leads to win Federal Communications Commission approval, granted last May, for the use of antipiracy technology that allowed the new on-demand plan to proceed.

Executives from Fox, Sony, Universal and Warner declined to speak publicly about the matter. But executives with several of the studios, who spoke on condition of anonymity to avoid conflict, said they had repeatedly told theater executives that they were closing in on the details of a premium on-demand plan, the broad outlines of which had been publicly discussed for months.

According to those executives, theater owners are now considering a number of retaliatory steps, which could include demands to be paid for showing trailers of a film that may wind up with an early video showing, or to be given a higher percentage of the box-office receipts for those films.

In an interview this month, Jim Gianopulos, a chairman of Fox Filmed Entertainment, ascribed much of the opposition to fear of “monsters in the closet” — hypotheticals under which movies would be offered on demand even more quickly or at lower prices than anyone now contemplated.

Along with Kevin Tsujihara, a member of Warner’s three-member office of the president, Mr. Gianopulos was identified last week by other studio and theater executives as a primary advocate for the current plan, which lets studios experiment with the timing and mix of on-demand films without immediately shaking the theatrical market.

In a measure of the situation’s delicacy, Mr. Cameron — who is deeply involved with Mr. Gianopulos on two sequels to his 3-D hit “Avatar” — was the first to put his name on the filmmakers’ letter of opposition. “I do feel it’s not wise to erode your core business,” Mr. Cameron said.

The Directors Guild of America, which typically keeps an eye on matters of concern to directors, has so far been publicly silent, leaving the theater owners to organize support from filmmakers as prominent as Michael Mann, Guillermo del Toro and Kathryn Bigelow. “The D.G.A. has not taken a position at this time,” Sahar Moridani, a spokeswoman for the guild, said in an e-mail. Old hands in the film business point out that past changes in viewing technology did not bring the calamity that was sometimes predicted.

“I think it will do harm,” Sidney J. Sheinberg, who was president of MCA in Mr. Wasserman’s era, said of the new on-demand plan — yet Mr. Sheinberg also acknowledged that he had been wrong in seeing videocassettes as a threat, rather than a boon, to the studios in the early 1980s.

On Friday, Mr. Dodd said he regretted that something as important as the new service had such a ragged introduction.

“Can there always be a better way of dealing with these things? Of course there can,” Mr. Dodd said. He said he was planning to do some bridge-building with Mr. Fithian, a longtime friend.

As Mr. Dodd sees it, the new on-demand program is a test that might prove especially valuable to potential viewers he described in an earlier e-mail as including “families with young children, senior citizens, the disabled and those living in remote areas.”

As for theaters, he said on Friday, no studio wants to see them diminished as a primary showcase for their films. “They don’t make these things for small screens,” he said.