My Conference Call Notes

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By Newsman
October 20, 2005

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Here are things I found most intriguing, in descending order of importance, some not yet mentioned:

� There is literally NO upside to 06 earnings estimates, because if they see themselves making more, they will just plow the money back into subscriber acquisition. Interesting to see how this affects the stock.

� Over the next six months, they will test lower price points. But they will roll these out across the board only if the elasticity of demand increases growth rate without sacrificing their forecast profits.

� Netflix probably can't buy BBI Online because of FTC restrictions. Clearly they have looked into the idea. And of course, they validated my thought that they might prefer a weak, non-threatening competitor to be in the market with them as a wider moat against new competitors entering. (Or the thought that they'll eventually get all of BBI's subs for free through attrition of the BBI Online service.)

� They are pushing out their movie downloading rollout because they can't get licenses for content for it. This would be alarming except that they assert that nobody else can get those licenses, either, because TV networks have locked in the desirable content for periods of five years by paying a bunch of money. This will change when Netflix, Apple, Comcast, et al, can collectively outbid the networks for rights to these movies. I think this is fascinating. Reed thinks this plus another product cycle of high-def DVD will give Netflix MORE time than previously estimated to extend its lead. I approach all this with a healthy skepticism, but if he's right it's great news.

� Reed asserts that as more families own large-screen high def TVs, it is altering movie viewing habits and causing families to stay home and watch DVDs rather than going to the movies. This trend is the explanation for the dismal box-office performance at American cinemas, not a weak release schedule. Interesting concept that makes intuitive sense to me and would love to hear someone pick the idea apart.

� Netflix now believes that Amazon won't enter online DVD rental market, and that Netflix is on the verge of having an online lead that makes it unassailable because of improving economies of scale and its subscriber lead.

� If Netflix "tips" bricks-and-mortar stores out of business, this will happen gradually, not suddenly, as most likely chains will not shut unprofitable stores until their leases come up for renewal on a 5-10-year cycle.

� It sounds like the mix of subscribers is shifting toward the lower priced plans, and that Netflix likes this trend because the lower priced plans are more profitable than 3-out.

� As Ace noted, the ad and used initiatives won't be material in 06.

� Disc usage is down. Though not specified, it sounds way down. As long as churn stays low, I'm okay with this. My guess is that they are able to steer would-be canceling subs to a lower-priced plan and keep more of them. All in all, very positive trends.

� There IS upside built into the subscriber forecasts if SAC continues to come in lower than the conservative forecasts the company has offered. That could get them to 6M in 06, IMO.

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