Netflix (Nasdaq: NFLX) reported that 1Q income came in at $9.9 million up up from $4.4 million in 1Q06, a rise of 125 percent. Though its earnings decreased 33.6 percent when compared to 4Q06’s results of $14.9 million. During its conference call, Reed Hastings, Netflix co-founder and CEO, cited increased competition from Blockbuster for results being “at the low end of the range.” On the revenue front, Netflix posted a 36 percent gain with $305.3 million, an increase over 1Q06’s $224.1 million. It also saw a 10 percent sequential growth rise from 4Q06’s $277.2 million. Additionally:

-- Subscribers: Netflix ended 1Q with approximately 6.8 million subs, representing 40 percent year-over-year growth from 4.8 million in 1Q06. Those numbers also represent an 8 percent gain from 6.3 million during 4Q06.

-- Looking ahead: For 2Q, Netflix to increase its subs to 6.9 million, while raising revenue to $309 million and expects income to range between $13 million to $17 million. Earnings Release | Webcast

Update: Blockbuster’s Total Access subscription service gives consumers free in-store rentals when they return DVDs they ordered online to a store, as opposed to dropping it in the mail.
During the conference call, Netflix derided Blockbuster’s aggressive pricing under that service, with Hastings noting ruefully that “when you’re giving away the store, you’re going to impact competitors’ businesses.” He predicted that Blockbuster won’t be able to sustain its subscription program at current prices. Barry McCarthy, Netflix CFO, offered the view that Blockbuster would raise prices and that Netflix will gain subscribers when that happens. “The larger Blockbuster’s business grows, the more money they’ll eventually lose,” McCarthy said. “ We had projected them to lose around $150 million to $200 million and we’re now leaning towards the higher end of that range. Blockbuster says that it’s offering $42 of value to subscribers at an $18 cost. That’s great for subscribers and bad for shareholders.” Blockbuster is scheduled to release its 1Q earnings on May 2. Analysts like Lehman Brothers noted today that Blockbuster’s challenge has forced Netflix to cut its year-end subscriber guidance by 8 percent to 7.55 million subscribers at the mid-point from 8.2 million previously.  The company also lowered FY07 revenue guidance to $1.21 billion to $1.26 billion from $1.25 billion to $1.3 billion previously, a 3 percent reduction at the mid-point.

-- Netflix On Digital Video: The company began providing streaming video for about 1,000 movies in 1Q and said it would spend $40 million this year to build the video downloading service. McCarthy illustrated how it plans to carve out a niche for itself amid competition from Apple, Amazon and others. “As for the long-term competitive structure, while Apple is a very strong player. They’re focused on the digital file ownership model, which makes sense for them, given that it’s a nice extension for the iPod. Then there’s the ad-supported market, which will probably be the largest of the three segments. Obviously, YouTube is out in front, Joost and Yahoo and a lot of others are coming after that. Then you have the content providers themselves, NBC and ESPN want a piece. Lastly, there’s the subscription-based, video rental, pay-TV segment, which we’re focused on, and we’re clearly the leader. Our fundamental view is that internet video is going to get to the TV in an open manner. If it turns out that the only way to get to the television is to go through someone’s pipe that has exclusive access, you’re going to tax everybody severely and that wouldn’t generate a very profitable market. We don’t think that’s likely to happen. The traditions and technology that underlie the internet means that there’s broad amount of bandwidth to televisions in America over the next 10 years. It will be open-accessed, which means a lot of great possibilities for independent services such as Netflix.”

-- Exclusive Movie Rights: Last week, HBO and Universal announced an extension of their business relationship from 2011 to 2016, which allows for a window of exclusive access for certain movies. “This exclusive rights issue is one of many things that prevents online video from being as big as it might otherwise be. It extends the life and importance of DVDs because the deals are all chopped up in various pockets,” McCarthy said. 

• Industry Moves: Netflix Taps ReplayTV Founder to Head Internet TV Group