Online DVD rental firms find big profits in tough times

A day after U.S. online DVD rental service Netflix surprised market analysts by posting a 45 per cent increase in fourth quarter profit, a company that is serving the Canadian market is saying it too expects "strong" — but more modest — growth over the course of the year.

Netflix earned $22.7 million US, or 34 cents per share in the fourth quarter, defying expectations in the face of an ailing economy in the United States. During the same period in 2007, net income was $15.7 million, or 23 cents per share.

The company, which allows users to rent DVDs on the internet for delivery by mail, attributed much of its growth to the streaming video service it unveiled two years ago.

"It's very clear streaming is energizing our growth," Reed Hastings, Netflix's chief executive, told the Associated Press on Monday.

While Netflix isn't available in Canada, Zip.ca offers a similar service, delivering movies to customers for a monthly subscription fee. The company says it has had a healthy few months, with five per cent growth in the fourth quarter and 11 per cent growth over the last six months.

The company also predicts growth of between four and five per cent in January, Zip.ca C.O.O. Curt Millar told CBC News, though he would not provide further details, citing the fact Zip.ca is a private company.

"We expect the [growth] trends to continue," Millar said. "It may not continue at the rate we've seen, but we expect strong growth over the course of the year.

"I think there's probably a big similarity," Millar said of the outlooks of Netflix and Zip.ca, "because they provide [services] that are very cost effective and good value for money."

In tough times, consumers tend to cut down spending on big-ticket items, while DVD rentals usually survive the cull, he said.

Online rentals unavailable in Canada

One major difference between the companies is that Zip.ca doesn't offer videos online — yet.

"We're ready to offer that today," Millar said. "We've built up the infrastructure — it's just right now the content we have isn't the content we want to provide to the public."

Millar said Zip.ca isn't interested in providing five-minute amateur videos such as those available on YouTube. Instead, he said, his company wants to be able to deliver "high quality" mainstream entertainment.

The problem, he says, is that the content rights haven't been available as readily as they have been in the United States.

Millar said it is hard to say when streaming video could be available, and in what form — whether it would be in a streaming or a download format, or whether customers would pay a fee for videos or whether advertising would carry the cost.

Compared with the United States, "the online DVD market in Canada is still in its infancy," Shelagh O'Connor, Zip.ca's communications director, told CBC News. "There's still not a lot of market penetration."

Netflix believes it's still gaining momentum in the United States, even as the economy deteriorates.

Management predicts it will attract 700,000 to 900,000 more subscribers during the current quarter, yielding earnings ranging from 25 cents to 33 cents per share on revenue of $387 million US to $393 million US.