SAN FRANCISCO — Netflix subscribers watched more than 1 billion hours of online video last month as the advent of high-speed Internet connections and high-powered mobile devices change people's viewing habits.
The milestone announced Tuesday by Netflix CEO Reed Hastings came a day after Citigroup analyst Mark Mahaney issued an upbeat report about the company's future.
The rising usage of Netflix's Internet video service may turn out to be a mixed blessing as the company phases out its DVD-by-mail rental service to focus on its goal of building a lucrative franchise in Internet-streamed video.
Netflix is trying to wean people off DVDs to save on mailing costs and reduce its investment on a format that it expects to become obsolete. Delivering Internet video is quicker and less expensive than discs, but the streaming selection isn't as extensive as what's available on DVDs. To compensate, Netflix has been spending tens of millions of dollars during the past two years to add more compelling titles.
Netflix's increasing popularity indicates that those efforts are resonating with subscribers. That's important because it helps validate a strategy that called for Netflix Inc. to invest heavily in video-licensing fees, even though the spending is expected to saddle the company with an annual loss this year — the first time that has happened in a decade.
TV, movie studios worried
But Netflix's licensing bill could climb even higher, if TV and movie studios interpret the growing streaming viewership as a threat to the revenue they reap from advertising-supported entertainment bundled in cable-television packages.
One of the biggest reasons that Netflix's streaming service is catching on is because it costs just $8 per month to watch an unlimited amount of video without commercial interruptions. The average cable-TV subscription costs about 10 times more, with advertising interspersed with the programming on most channels.
Netflix now has 26.5 million worldwide subscribers to its streaming service, more than the 22.3 million TV subscribers at the leading cable provider, Comcast Corp. (Msnbc.com is a joint venture of Microsoft and NBCUniversal, a unit of Comcast.)
Cutting the cord
Hastings has tried to position Netflix as a supplement to cable-TV subscriptions, but that argument will become more difficult to make as Internet streaming cuts down the amount of time people spend watching traditional TV, Wedbush Securities analyst Michael Pachter said.
In the most extreme instances, some households have canceled their cable packages entirely — a process known as "cutting the cord" — and relied on a lower-cost alternatives such as Netflix or another service such as Hulu.
"Netflix is starting to cannibalize cable-TV viewership and it could start cannibalizing advertising, too," Pachter said. If that happens, he expects Netflix's licensing fees to rise even higher than the company has been anticipating as studios try to make up for the revenue they lose from cable providers and advertising-supported broadcasters.
The 1 billion hours of online viewing in June works out to a monthly average of about 38 hours per streaming subscriber. That's up from an estimated monthly average of 28 hours in December, based on the 2 billion hours of combined streaming activity that occurred during the final three months of last year. That was the most recent time that Netflix had quantified its streaming usage.
Mahaney's report said that more than one-third of Netflix's streaming subscribers watch about as many TV series as they do movies over the Internet.
That trend also could reinforce the perception that Netflix looms as a threat to the cable-TV industry.
Hastings, though, has insisted that Netflix helps drive more viewers to some series by making it easier for people to catch up on previous seasons. He believes the availability of the first four seasons of "Mad Men" in Netflix's streaming library, for instance, helped increase viewership for new episodes on AMC this past spring.
Less vulnerable because of Internet
Internet video appears to be making Netflix less vulnerable to seasonal shifts than it had been when most of its subscribers used the service to rent DVDs. The company used to experience a slowdown during the summer months when many subscribers were on vacation or spending more time outside to take advantage of the longer days.
Breaking through 1 billion streaming hours in June suggests that pattern is changing now that most subscribers can watch a movie or TV show on the service anywhere they want at any time they want, as long as they have a device with an Internet connection.
As of March 31, Netflix had just 2.7 million customers who subscribed only to the DVD rental plan. About 19.1 million are streaming-only customers and the remaining 7.4 million get both.
Mahaney's report estimated that 35 percent of iPad owners watched a Netflix-delivered video in June, up from 30 percent in September. Netflix consistently ranks among the 20 most downloaded applications on the iPad.
As more Netflix subscribers embrace streaming, Mahaney expects the rate of customer cancellations to decline and the positive word-of-mouth to win over more households, especially those that own iPads and other tablet computers. He predicts Netflix's stock could rebound back to $130.
Pachter believes his fears about Netflix having to pay even higher licensing fees will pan out, forcing the company to either raise its prices or shoulder more losses.
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