Netflix reveals key driver of profitability (2Q05 NFLX conf call quotes)

Questions on Netflix' (ticker: NFLX) conference call focused on two seemingly mundane yet critical issues for the company. First, the churn rate among Netflix' subscribers fell, and that metric has a dramatic impact on future subscriber projections. Second, Netflix launched a new low-cost movie rental plan ($10 per month) that turned out to be more profitable than the company's core $18 plan. Here are comments from CEO Reed Hastings and CFO Barry McCarthy about the low-cost plan:

Reed Hastings, CEO

…the churn is substantially lower on the $9.95 plan, so consumers, when we say we really love it, they love it...
… There's two big drivers of churn: One is price. And you noticed that last year when we raised price, churn went up, and last year when we brought price down, churn went down substantially. ...the $9.99 program has the lowest churn of any of the programs…

Barry McCarthy, CFO

Last quarter when we spoke with you about the introduction of the new price points, we said that we expected the contribution margin on those plans, which is gross profit, less fulfillment expense on a dollar basis to be roughly equivalent across the plans, and so we were optimistic about our ability to continue to drive profitability even as ASP was dropping. And that's as much color commentary as we've given on those new plans, and we have elected not to give gross margin guidance…

Reed Hastings, CEO

… subscribers who are pretty light movie users gravitate to the light program. So they don't watch that many movies. They're very casual, whereas people who are film buffs gravitate towards the three-out, $18 program. …the $9.99 is higher margin because it's lower usage.

(Quotes are from the CCBN StreetEvents transcript.)

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