9% of U.S. households subscribe to Netflix

Los Gatos (CA) – Netflix has shown solid growth in the second quarter and now has 10.6 million subscribers, or about 9.1% of U.S. households. The San Francisco Bay area leads the nation with a share of 20.7%. Blu-ray adoption still isn’t great as consumers are moving toward cheaper subscription plans and Redbox appears to be emerging as the main rival for Netflix in the movie rental market.

Netflix attributes its growth to the addition of video streaming service, which the company says is used by “millions of users”. During the Q2 earnings conference call, chief executive officer Reed Hastings said that Netflix views the San Francisco Bay area as “a leading indicator of internet behavior elsewhere in America and are thus encouraged by these large and growing penetration rates.”

The company reported revenue of $408 million for Q2, up 21% from a year ago; net income was $32 million, up 22% year over year. The company said it experienced a 26% year over year growth in subscribers that, however, was offset by a lower average revenue per user “due to the growing popularity of our lower priced plans that include unlimited content delivered both by streaming and by DVD by mail.”

Still, the company said that its shipments of DVD and Blu-Ray discs saw solid growth year over year, which the company believes is driven by the closure of local video stores. Netflix now considers Redbox as a key rival and mentioned that “both Netflix and Redbox are growing at the expense of video stores.” And the company conceded that Redbox may be growing at the expense of Netflix: “Definitely the subscribers who leave us who used to go to video stores now go to Redbox,” Hastings said. Redbox claims that 5% of its customers are former Netflix customers.

Blu-ray remains a touchy topic for Netflix. The company says that about 10% of its subscribers are paying extra for Blu-ray discs and that the additional Blu-ray pricing “reflect the higher prices that studios charge for high definition content.” However, the company also admitted that it used the Blu-ray pricing to work against a continuing trend of declining average revenue per user (ARPU): “The Blu-ray price increase helped. The ARPU decline would have been larger without it, but not hugely materially. More people taking the lower priced plans than in the past,” Hastings said during the conference call.  
The company hopes that the Blu-ray adoption will increase as Blu-ray player prices fall. But clearly, charging more money for Blu-ray discs does not really help to achieve this goal quickly.