Netflix Moment of Truth Is Coming

Home video subscription service Netflix is scheduled to report its first-quarter earnings after the stock market closes Monday.

WHAT TO WATCH FOR: Investors will be looking for signs of whether increased competition or recent price increases may be finally slowing the phenomenal subscriber growth that has turned the Los Gatos-based video service into a Hollywood power broker and a Wall Street darling during the past two years.

After Netflix ended last year with 20 million subscribers in the U.S. and Canada, the company predicted it could add as many as 3.7 million more customers during the first three months of the year. Most of the subscribers either pay $8 per month for the right to stream unlimited video to TVs and other devices with high-speed Internet connections or pay a little more to get DVD rentals delivered by mail. Netflix raised its prices on the plans that include DVDs this year to encourage more video streaming in an effort to hold down its postal expenses.

The popularity of Netflix's expanding video streaming library is the main reason the number of subscribers has more than doubled from 9.4 million at the end of 2008. Since then, Netflix's stock price has soared eightfold to give the company a market value of $13 billion — higher than some of the studios that provide the content for its service.

Netflix's success is attracting more competition. Perhaps the most formidable new entrant is Amazon.com Inc., which includes a free video streaming feature to online shoppers who pay $79 annually for discount shipping. Amazon's 2-month-old streaming service so far only offers a fraction of the TV shows and movies available through Netflix.

To make its service more compelling, Netflix has been paying higher fees to gain streaming rights to fresher and, in some cases, exclusive material. In what may have been its biggest deal of the first quarter, Netflix paid an undisclosed sum for the rights to 26 episodes of a new TV series called "House of Cards" that will star Academy Award-winning actor Kevin Spacey.

Some TV networks, most notably Time Warner Inc.'s HBO, view Netflix as such a threat that they won't license their shows to the service.

WHY IT MATTERS: Netflix is creating new and convenient ways to watch video at home or on the road through mobile devices such as Apple Inc.'s tablet computer, the iPad. That is making it easier for people to cancel their cable television subscriptions to save money.

As long as the company's revenue is rising, its management plans to keep spending on video streaming rights to give subscribers even more entertainment options.

WHAT'S EXPECTED: Analysts polled by FactSet expect earnings of $1.07 per share on revenue of $706 million.

LAST YEAR'S QUARTER: Netflix reported net income of $32.3 million, or 59 cents per share, on revenue of $494 million.

Copyright AP - Associated Press
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