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February 7, 2013

Netflix won't miss Saturday mail delivery, even though the weekend service helped keep its DVD-by-mail subscribers happy.

The U.S. Postal Service's planned shift to five days of home delivery a week instead of six may even make Netflix Inc. slightly more profitable by lowering the costs for sending out its familiar red envelopes with DVDs. That's because subscribers may be able to watch fewer DVDs for the same monthly price. For Netflix customers, DVDs that used to arrive on Saturday would come on Monday instead, delaying when they could watch a movie and send it back for the next one. Those who want to make sure they have a DVD to watch on the weekend might have to mail the discs back to Netflix a day earlier to ensure that they receive it on Friday.

However, analysts believe few customers are likely to mind. Most Netflix subscribers no longer get DVDs anyway, and those who do often let their discs sit on shelves for days or weeks, so the extra waiting time won't hurt that much. Complaints are more likely to come from subscribers who try to watch as many DVDS as possible each month , an unprofitable audience for Netflix anyway. Investors reacted positively to Wednesday's announcement that the U.S. Postal Service intends to stop Saturday home delivery beginning Aug. 10. Netflix's stock gained $10.02, or nearly 6 percent, to close Wednesday at $184.41. Earlier in the session, the stock hit a new 16-month high of $185.14.

Under the plan, mail would be delivered to homes and businesses only from Monday through Friday, but it would still be delivered to post office boxes on Saturdays. The plan, designed to save about $2 billion a year, could face a challenge from Congress. Investors' reaction might have been different if Saturday mail service had been eliminated three years ago, when the idea was first broached. Back then, mailing DVDs was still Netflix's main business. It was so important that Netflix grew into the postal service's biggest customer. When the total number of Netflix's subscribers receiving DVDs peaked at 24.6 million during the summer of 2011, the company was spending about $600 million annually for discs to make the round trip between customers' homes and dozens of distribution centers around the U.S.

Netflix began this year with just 8.2 million DVD subscribers, and the number is expected to keep dwindling as the instant gratification of being able to watch video over the Internet makes the notion of watching movies and TV shows on DVDs seem antiquated. By contrast, Netflix had 27.1 million Internet video subscribers in the U.S. at the start of the year. It doesn't even offer the DVD option in Canada, Latin America, the United Kingdom and other markets it's expanding to. Janney Montgomery Scott analyst Tony Wible estimates that Netflix will spend about $300 million on postal expenses this year and perhaps as little as $200 million next year, depending how many more DVD subscribers cancel their service. The company no longer discloses its postal expenses.

The DVD-by-mail service began to shrink in mid-2011 when Netflix unbundled it from its rapidly growing service for streaming video to TVs and other devices with high-speed Internet connections. The change required Netflix customers to pay separate monthly fees if they wanted both Internet video and DVDs through the mail, which offered the latest theatrical releases more quickly. The switch raised Netflix's prices by as much as 60 percent for those who wanted both options, much to the anger of hundreds of thousands of subscribers who canceled. Most customers, though, decided to stick with Internet video and dropped DVDs. If Saturday mail delivery ends as planned this summer, even more subscribers may opt for a streaming-only plan.

Wedbush Securities analyst Michael Pachter doubts most DVD subscribers will care about the loss of Saturday delivery. The customers most likely to be irked are ones who typically watch eight to 10 DVDs per month, because four or five fewer days of mail delivery each month will make it more difficult to get as many discs. "Those guys cost them money, so if they quit, it won't hurt them," Pachter said. Netflix makes more money when its subscribers watch fewer DVDs in a month because its expenses go down while the monthly fee remains unchanged. The DVD plans start as $8, as do the ones for Internet streaming.

Even though Netflix has fewer DVD subscribers, that side of the business is still slightly more profitable than the streaming service. That's mainly because Netflix's licensing fees for Internet video are higher than its DVD expenses. Netflix, which is based in Los Gatos, Calif., had little to say about Wednesday's developments, other than to say it's "in favor of a healthy postal service." Netflix CEO Reed Hastings was more forthcoming during an April 2010 conference call with analysts. If Netflix were to lose Saturday home delivery before the company had more time to expand its streaming service, "it's not a good thing for us," Hastings said then. "We hope they hold off as long as possible, but we're also cognizant that the total health of the USPS is at stake, and they may need to make changes that they need to make." Associated Press


Waterlogged SpongeBob may have found himself a lifeboat. At least that is what some Viacom investors took from comments by Chief Executive Philippe Dauman after the company's fiscal first-quarter earnings report on Jan. 31. Mr. Dauman said advertising sales in the current quarter would be close to flat versus the previous year and would begin to improve after that. For Viacom, which has been plagued by lower ratings and ad revenue at its cable networks, such improvement could be accomplished in a number of ways: a general rise in ad spending, a boost to ratings or simply that Viacom is coming up against last year's weak results. The company says it has been investing in content, including new programming. But total-day ratings for Nickelodeon and MTV were still down 9% and 12%, respectively, in January.

Viacom's rivals are doing better. While its fiscal first-quarter ad revenue fell 6%, Time Warner said Wednesday that ad revenue grew 3% in its latest quarter, while Walt Disney said Tuesday that ad sales rose 2%. Viacom's stock has trailed, rising 30% since the beginning of 2012. Time Warner and Disney shares are up 44% and 45%, respectively. But Viacom's stock still isn't cheap. Looking at a multiple of 2013 earnings before interest, taxes, depreciation and amortization-arguably the best measure of operational performance, given the companies are buying back varying numbers of shares-Viacom trades at 9.5 times, compared with 9.2 times for Time Warner and 10.8 times for Disney. And Viacom's Ebitda is expected to grow only 2.1% in fiscal 2013, compared with 7.2% and 9.6%, respectively, for those two rivals. Viacom may yet achieve its turnaround. But investors buying its shares appear to be paying up as though it has already happened. Wall Street Journal


Time Warner Inc.'s profit rose 51% in the fourth quarter thanks to cost cutting and strength at the company's television networks. The media conglomerate also issued an upbeat earnings outlook for the new year on Wednesday, and its stock was ahead 4.1% at $52.01 in 4 p.m. composite trading on the New York Stock Exchange. While revenue for the quarter was flat at $8.2 billion, costs and operating expenses both declined. That helped operating profit rise to $2 billion from $1.7 billion a year earlier. Time Warner, which has bought back stock aggressively in recent years, announced a new $4 billion share repurchase program. It also increased the quarterly dividend by 11%.

Revenue rose 5% in its networks division, which includes TNT, TBS, CNN and HBO. The improvement was driven by a 7% increase in subscription revenue and a 3% increase in advertising revenue. Network costs were almost flat, which helped operating income for the division rise 21% to $1.4 billion. On an investor call Wednesday, the company said advertising revenue would be flat in the first quarter due to a lower number of major sports events, but growth would resume in the second quarter. Asked about a potential threat to HBO from video-streaming service Netflix Inc., Time Warner Chief Executive Jeff Bewkes said the premium channel's large number of original series should continue to set it apart. Netflix recently added the original series "House of Cards" starring Kevin Spacey to its offering in a bid to compete with the likes of HBO and Showtime. Mr. Bewkes said it would take Netflix "a while" to build a larger number of successful originals.

In the latest quarter, Time Warner's film and TV entertainment division reported a 29% increase in operating income, despite a 4% decline in revenue. The year-earlier quarter was boosted by the theatrical release of titles including "Harry Potter and the Deathly Hallows: Part 2." But the division had lower print and advertising expenses as well as strong sales of high-margin television programming. The publishing group, which includes magazines People and Time, suffered a 7% drop in revenue to $3.4 billion as advertising demand weakened. In turn, operating income fell 25% to $420 million. The company previously announced a 6% reduction in the publishing division's workforce to cope with the soft advertising market. Overall profit for the three months through December rose to $1.2 billion, or $1.21 a share, from $773 million, or 76 cents, a year earlier. For 2013, the company said it expects adjusted earnings per share to rise at a low double-digit percentage pace. Wall Street Journal

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