Netflix Readying Tiered Digital Streaming Service

While Netflix currently offers video streaming free to existing subscribers starting with the $8.99 monthly package, that may change over time, McCarthy said. But streaming won’t likely replace conventional DVDs until Netflix’s service is in more than 20 percent of the 110 million U.S. households, McCarthy said. While Netflix’s penetration is 19 percent in the San Francisco area, on a national basis it’s 8.1 percent, McCarthy said. Netflix recently passed the 10 million subscriber mark. Netflix CEO Reed Hastings has said a tiered video streaming service could launch by 2010.

The DVD-based service will exist for “a long time” and the growth of video streaming will be paced by the availability of Netflix-capable products, McCarthy said. LG Electronics and Samsung have shipped Netflix-enabled Blu-ray players. TiVo, Microsoft and Roku also field Netflix-capable streaming devices. LG and Vizio are expected to ship Netflix-based LCD TVs later this year.

“It depends on how well we build out streaming, which would be a substitute for the by-mail service,” McCarthy said. Since many of the streaming devices are sold as holiday gifts, it “will be many Christmases before the penetration of such a service matters,” McCarthy said. But Netflix “wants to get there and establish a value proposition to make it challenging” for any potential competitors, he said. The service will grow as “second-generation” streaming devices under development start shipping. About 12,000 of Netflix’s 100,000 titles are available for streaming, company officials have said.

Video streaming could be profitable since it could potentially dispense with the need for packaging, labor and other expenses, McCarthy said. It could move into the mainstream faster than the by-mail service did and “drive a lot more profit,” he said. Netflix also would shift to a fixed-cost business akin to broadcasters, McCarthy said. While Netflix hasn’t set pricing for streaming, $5 monthly fee for unlimited access would be “a little extreme” at the low-end while $20 “is at the opposite end,” McCarthy said. Netflix’s investment thus far in streaming “has been a tax” on its profit and loss and hasn’t produced a “net benefit” yet, McCarthy said. But when Netflix began adding U.S. distribution centers in 2002 to move the service closer to subscribers, within six months of their opening customer retention improved and churn slowed, McCarthy said. Netflix’s Q4 2008 monthly churn rose slightly to 4.2 percent from 4.1 percent in Q3, due largely to the U.S. economic crisis, McCarthy said.

Netflix also has added Starz Entertainment’s Starz Play to its streaming line-up, although some films were taken down for a period of time to “meet studio concerns,” McCarthy said.

Jefferies Conference Notebook…

Billionaire investor Carl Icahn will likely seek a “more active role” in Lionsgate Entertainment in the wake of boosting his stake in the company to 14.3 percent, Lions Gate Vice Chairman Michael Burns told us. Burns was to meet Icahn for dinner Wednesday in New York, he said. Icahn has been a long-term investor in Lionsgate, having first amassed 3.6 percent of the company in 2005. Icahn increased his investment to 9.2 percent last year, saying Lionsgate was “undervalued.” Icahn, who said he might seek representation on the Lionsgate board, paid $112.7 million for his initial investment, which was valued at $78.9 million based on Wednesday’s price of $4.80 a share. “His goals are pretty simple: he wants to make money,” Burns said. “He very much believes in content and saw our bad quarter as a chance to do that. He talked about board seats and we'll see how that all turns out.” Icahn’s former Chief Investment Officer Mark Rachesky owns 17.6 percent of Lionsgate. Unlike Icahn, Rachesky disclosed his position as a passive investor who doesn’t seek to influence company operations. Meanwhile, Lionsgate’s Epix venture with Viacom, MGM Studios and Paramount Pictures expects to sign the first carriage deals in the spring for their proposed multi-platform network, Burns said. Epix recently gave the go ahead for its first original series -- Lions Gate’s Tough Trade. Epix will launch online in May and emerge as a cable or satellite channel in October, Burns said. Lions Gate also won’t have trouble funding three movies in its fiscal 2009 slate that were to receive money from its Goldman Sachs-led Pride Pictures facility. Goldman Sachs pulled out of the agreement earlier this year, leaving Lionsgate to pay for the already released films The Spirit, My Bloody Valentine 3D and Tyler Perry’s Madea Goes to Jail. The Spirit lost $18 million to $19 million, but My Bloody Valentine and Tyler Perry produced $50 million and $41 million in box office revenue, he said. Lionsgate reached agreement with Pride Pictures nearly two years ago to finance as much as 50 percent of the company’s production, acquisition, marketing and distribution costs up to $196 million. The fund invested in a dozen films, including Forbidden Kingdom and 3:10 to Yuma and was to finance a total of 23 movies, company officials said. “The concern about us not having enough funding” for additional movies is unwarranted, Burns said. The film fund was to pay for half the production costs net of foreign sales, Burns said. “Lionsgate is going to be in a better position for not having a partner,” Burns said. “It’s a question of when we're writing the check, but it’s more than offset by the profits of the slate going forward.” Lionsgate has a Canadian film fund, S.G.F., that can provide up to $140 million over a four-year period (capped at $35 million a year) that is about halfway through its term. It also has a $340 million revolving credit agreement with JPMorgan Chase. Lionsgate also will complete its $255 million acquisition of TV Guide Network this month from Macrovision. It will seek a financial or strategic partner for TV Guide Network, which gives Lionsgate another outlet for its programming, Burns said. “The good thing about TV Guide is that gives us a hedge that if the syndicated market wasn’t good for a Mad Men or Weeds program, we would have the ability to take it and put it on the air,” Burns said.