Netflix Lands Sony PS3 Distribution Deal, Bolstering Streaming Footprint

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Includes: NFLX, SNE
by: Larry Dignan

Netflix’s (NASDAQ:NFLX) streaming movie and TV service will be made available to Sony’s (NYSE:SNE) 9 million PlayStation 3 customers under a distribution partnership announced Monday.

Netflix said it will begin streaming through the PS3 next month (statement, Techmeme, PlayStation blog). The move gives Netflix another leading game console for streaming—it also has a deal with Microsoft’s Xbox.

The Sony pact could be a double bonus for Netflix. For starters, the PS3 is also a Blu-ray player so its users may be more inclined to also use Netflix’s DVD-through-the-mail service.

On Netflix’s third quarter conference call, CEO Reed Hastings hinted that the company would announce a big deal with a leading consumer electronics company.

One potential complication for the Sony-Netflix pact is that it will require a “streaming Blu-ray disc” that will need to be in the PS3 to show the movies and TV episodes available. The disc uses Blu-ray’s BD-Live technology to get to the Internet and activate Netflix. Simply put, the disc isn’t as smooth as a straight embed of the Netflix service. Netflix subscribers will have to order the disc—it’s free.

Netflix has been on a roll. The company’s third quarter earnings report last week revealed a company that’s largely recession proof, growing rapidly and setting itself up for streaming as its dominant business model. Netflix has a DVD-rental business that’s doing well and a streaming service that’s expanding its footprint.

The company reported third quarter earnings of 52 cents a share, 7 cents better than Wall Street estimates. Netflix ended the third quarter with 11.1 million. Revenue for the quarter was $423.1 million, up 24 percent from a year ago.

The company’s third quarter conference call has a bevy of notable nuggets. Among the notable quotes from Hastings:

  • “Of the 115 million estimated households in America, 9.6% now subscribe to Netflix. In the greater San Francisco Bay Area, which we believe is a leading indicator of Internet behavior elsewhere in America, 21.2% of households now subscribe to Netflix, up 13% from one year ago.”
  • “Our rollout of Saturday shipping is now complete across our 58 distribution centers, and we have been working on automation of our distribution centers for many years, and shortly, we will place a roughly $40 million automation order for rental return machines that can accept the returning DVDs, open them, clean them, inspect them, and prepare them for reshipment. These machines will save us some money and improve the quality of our service. They make financial sense because our DVD shipment volume is still growing and we expect to be renting DVDs until 2030.”
  • “One year ago, approximately 22% of our subs instantly watched a TV episode or movie in Q3. Most of those 22% watched more than one TV episode or movie, but all 22% instantly watched at least 15 minutes. For Q3 of this year, that figure has grown to about 42% of subscribers.”