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Netflix Launches Unlimited Streaming-only Service

November 23, 2010

Shares of Netflix Inc.’s stock skyrocketed on Monday after the company unveiled its first unlimited streaming-only subscription plan, which gives members unlimited streaming of movies and television shows over the Internet without the need to rent DVDs by mail.

Shares of the Los Gatos, Calif.-based video rental giant rose $15.28 on Monday, or 8.83 percent, closing at $188.32.

Netflix said it would begin offering the new streaming-only subscription plan immediately in the United States, and would also increase prices on some of its other streaming and DVD plans.

The company launched its first streaming-only service in Canada in September.

New subscribers will have to pay the higher prices immediately, while current members will be charged higher fees beginning in January.

The new plan will cost $7.99 a month, while the prices for the 1-DVD and 2-DVDs out at a time plans will increase by $1.  The 3 DVDs-plan will rise from $16.99 to $19.99 per month, something Wedbush Securities analyst Michael Pachter said would likely cost the company 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 told Reuters.

The new plans will “have less of a beneficial impact than the Street is saying,” he added, referring to rise in shares of Netflix’s stock on Monday.

Netflix had 16.9 million members in the U.S. and Canada at the end of the third quarter. Known for its signature red envelopes for mail-in DVD rentals, the company competes primarily against Redbox, Amazon.com Inc. and Hulu, which officially launched its Hulu Plus paid service last week at a cost of $7.99 a month.

Netflix’s streaming video selection is still small compared with its DVD by-mail library.  Gabelli & Company analyst Brett Harriss said the company would have to continue investing in costly content agreements to increase its digital offerings.

Netflix has already invested heavily in partnerships with EPIX pay TV channel, estimated at $1 billion, and NBC Universal.

Netflix’s gross margins declined from 39.4 percent in the second quarter to 37.7 percent in the third quarter.  CEO Reed Hastings has said he would like to achieve long-term gross margins of between 30 percent and 35 percent.

Netflix’s move to offer the new streaming-only subscription plan demonstrates the company’s efforts to ultimately phase out sending DVDs by mail, Harriss said.

“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,” he told Reuters.

Netflix has seen enormous growth since the company’s inception in 1999, and shares of the company’s stock have soared since its 2002 IPO.  Its content is now streamed on a variety of devices, including smartphones video game consoles and TVs.

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