Netflix Gets a Boost from the Down Economy

Wednesday at Jeffries' annual Internet Conference, Netflix (NFLX) CFO Barry McCarthy delivered the most unusual of things for this earnings season: a positive announcement. On the back of a $100m stock buyout program, and decreasing competition from Blockbuster (BBI), Netflix raised their prior earnings guidance.

In his report, McCarthy said the company is now expecting first quarter earnings of 15 to 22 cents a share, up from prior forecasts that fell in the 13 to 21 cent range. Revenue and subscription numbers were also upgraded. Overall, Netflix now expects to end the March quarter with 8.16 million to 8.26 million subscribers (up from 7.85 to 8.05m). On the year, they expect about 500,000 more subscribers than previously reported (8.9-9.5m now, up from 8.4 to 8.9m).

Netflix attributed the upgrades largely to their stock buyback and to decreasing competition from Blockbuster (which has cut almost all advertising for their mail order program and is instead currently focusing on fixing problems in their stores) and smaller rival Movie Gallery (MOVI).

Another factor may also be influencing the upturn: decreased spending from financial services firms. It might seem unrelated but from the vantage point of Internet advertising, it isn’t. Financial services firms, it turns out, are among the largest buyers of Internet display advertising.

According to TNS Media Intelligence, seven of the top ten buyers of display ads in November 2007 were financial services companies. E*Trade (ETFC) topped the list with more than $16m in spending. Lending Tree and Fidelity (FNF), number two and three respectively, each spent in excess of $13m.

In a down economy, these financial firms are decreasing their ad spending. For Netflix, which is also a whale of a big spender in the category (Netflix spent more than $69m on display advertising between January and June 2007 [source: TNS]), this creates an opportunity. It becomes a matter of supply and demand: decreased spending from financial institutions means fewer ad buyers in the market for relatively fixed inventory. Fewer buyers competing can lead to lower prices. Lower ad rates for Netflix means lower customer acquisition costs (also called Subscriber Acquisition Costs “SAC”).

For Netflix, it seems, the same threat of recession or capital pullback that has media publishers reeling at the prospect of decreasing ad revenues could be a boost for their business (and it doesn’t hurt that the video rental business has historically been unaffected by a weakening economy).

Netflix also largely met or exceeded expectations in their 4th quarter earnings released in January. Their streaming on-demand service is gaining favor among subscribers too.