Interview: Netflix
>> netflix, one of the day’s worst performers on friday, shares of netflix down 41% in one friday session after the company lowered prices for its video rental service. netflix sends videotapes and d.v.d.’s to consumers through the mail. consumers then play a monthly fee. but the market is changing and analysts say netflix has its work cut out for it. amazon.com is launching a web-based service and blockbuster wants to expand its presence in that area, as well. suzy assaad spoke with netflix chief executive reed hastings and asked him if may can hold up against all that competition.
>> this market has grown so much faster than anyone could have expected. as you mentioned, this quarter we were $142 million in revenue, up 100% from a year ago. and a market that’s, you know, at a nearly 600 million run rate growing 100% year over year, attracts large competitors. we had been competing with wal-mart the last two years, blockbuster entered a few months ago, amazon will enter. all of this because it’s going to be a very large market . we think this market may actually be larger than the $2 billion online book market .
>> but is this, now, the biggest threat you have faced, bigger than blockbuster and bigger than wal-mart to have amazon come in? in? the changes you’ve announced seem to be substantial.
>> indeed. amazon is a bigger threat than blockbuster or wal-mart. and we’re a bigger company than we used to be. we’re glad that wal-mart and amazon didn’t enter, you know, four or five years ago. now we’re 500 million in sales, we’re over two million subscribers, shipping over three million movies per week and we have momentum so we look forward to this very large market .
>> in terms of your internal numbers, if amazon indeed is going to come into the market , what have you budgeted that you may lose in terms of market share if they do?
>> what we’re looking at is the market expanding substantially. there’s about $8 billion of video rental revenue from video stores and with these low prices, i think we’ll see a a mass conversion of people from video stores moving online and then the market will expand, really extraordinarily fast.
>> i have to tell you, though, several analysts disagree. they think that basically you are a market leader in what one has called a shrinking business that suffers from priceing pressure, low customer loyalty and increasing competition.
>> it’s hard to call it shrinking when revenues are up 96% on a year-over-year basis. the reason blockbuster and amazon are getting into it is because they see it as a growing business.
>> a growing business or possibly you’ve hit on something and they want to take that away from you for whatever is the pool of people using the service.
>> you know, that’s the great thing about competition is they’re entering, we’re lowering prices and the consumers are getting an incredible deal now, $18 a month, unlimited d.v.d. rentals from netflix. this is the american way.
>> would you ever think, have you considered taking on amazon with a partner? would you consider joining a merger?
>> that’s not something i’ll speculate on.
>> have you had discussions with your board about something like that?
>> no comment.
>> in the meantime, though, you have, as we mentioned, taken on and made drastic changes. how much do you anticipate your subscription rate will be for next year?
>> we’re 2.2 million subscriber s. at the end of 2005, we believe we’ll about over four million subscribers, nearly double what we are today because of more people coming online to get the great values.
>> that was our suzy assaad speaking with netflix chief executive reed hastings. delta air lines says its finances took a turn for the worst. delta’s third-quarter losses widened due to record high fuel costs and low fares. the nation’s third largest carrier expects to lose as much as $675 million. cash reserves also fell. an analyst says delta is under more pressure to work out a deal with pilots to stay out of bankruptcy, looking to cut their pay and benefits by a billion dollars. the company is also trying to get concessions from creditors in a reorganization plan. delta shares finished friday down 19%. while delta tries to work something out with its pilots, u.s. airways gets the green light to cut employee pay by 21% and suspend union contracts four months. a judge in virginia signed off on that today. u.s. airways filed for bankruptcy for the second time in two years back in september. the nation’s seventh largest airline wants to reorganize and compete with discount carriers like southwest. u.s. airways needs to cut labor costs by $950 million a year, otherwise lawyers say its assets could be liquidated. still to come, sprint says less and more. the long distance phone company is cutting jobs. details on that story and market reaction straight ahead. plus, the corporate earnings picture. so far, it’s been a mixed bag for the third quarter. we’ll take a closer look at the winners and losers so far.
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Listen Market briefing --- Bob (fast)
AIG --- Allan (slow)
NYSE --- Julie (slow)
welcome to the friday edition of “world financial report.” i’m bob bowden. stocks were higher on friday. the dow jones industrial average was up almost 39 points to finish you see there .4% higher at 9933. marsh & mclennan, the world’s largest insurance broker, says it will no longer seek referral fees from insurers, the announcement coming a day after new york attorney general eliot spitzer described those fees as payoffs and filed a lawsuit against the company. today, maurice hank greenberg, chairman and c.e.o. of a.i.g., american international group, held a conference call can with analysts to try to control the damage from the spitzer investigation. allan dodds frank has more.
>> greenberg is regarded as the patriarch of the american insurance industry. he and his two sons are caught up in eliot spitzer’s wide-ranging investigation into bid rigging in the insurance industry. number one target of spitzer is jeffrey greenberg, 53-year-old chairman and c.e.o. of marsh & mclennan, world’s largest insurance brokerage. spitzer sued marsh & mclennan yesterday, charging that the company had collected hundreds of millions of dollars in inflated commissions. spitzer urged the marsh board to remove jeff greenberg immediately, saying he would not negotiate with the company’s current leadership. in the lawsuit, the attorney general cited deals marsh had done with a.i.g. and with ace, the insurance company where greenberg’s son evan is president and c.e.o. today, an assistant vice president of ace pleaded guilty to a misdemeanor count, becoming the third witness to cooperate with attorney general spitzer in his investigation. spitzer has said that the industry systematically overestimates―overcharges customers, rigs bids and needs serious reform. hank greenberg said his company had been cooperating with the attorney general and is doing its own investigation. greenberg downplayed the extent of two a.i.g. officials who pleaded guilty yesterday and the extent of the alleged corruption, although he said a.i.g. has eliminated contingent commissions, at the heart of spitzer’s charges against marsh & mclennan.
>> i think we’ve done everything that we could possibly do to manage this issue and so from a business point of view, you know, i can’t speak beyond what the a.i.g. might or might not do, but i know our business will continue to grow as it has in the past.
>> marsh & mclennan also will no longer seek fees from the insurers, at least those categorized as contingent commissions. the senior greenberg predicted spitzer’s investigation will not have much effect on how the insurance industry charges customers.
>> i don’t think it will have a material impact on the pricing in the insurance industry. i think that will continue as i don’t think it will make rates go up or down. i think that will be more reflective of experience overall in the industry.
>> following spitzer’s press conference, other states have revealed they are also investigating the insurance industry, california among them. california insurance commissioner john garmmed endy told bloomberg news that he plans on filing suits against the insurance industry and promoting new regulations in his state soon.
>> that was allan dodds frank. looking at the insurance stocks and how they fared today, red arrows across the board. another day, according record for oil prices, breaking $55 a barrel before settling at $54.93 on the new york mercantile exchange, up .3% on the day. traders remain concerned about supplies heading into the winter.% fed chairman alan greenspan maintains the sharp rise in oil is not enough yet to slow down the u.s. economy. i guess we have more. oil prices are up 25% in the past month alone. but mr. greenspan says, don’t worry, prices are not headed to levels that we saw when jimmy carter was president. peter cook has more on that part of the story.
>> in his speech today to the national italian-american foundation in washington, alan greenspan acknowledged the impact high oil prices are having on the u.s. economy and warned that if they move materially higher, the consequences, in his words, will intensify. with the average price of crude in real terms at 3/5 of its peak in 1981, he says this is no repeat of the 1970’s.
>> the impact, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970’s.
>> greenspan says crude oil prices are distorted by the shortages in refining capacity. he says long-term oil futures have not kept pace with the record spot prices for a barrel of oil, an indication, he says, the rise in spot prices will likely wash out over time and greenspan downplayed concerns that the world will run out of oil for an ultimately transgating to alternative forms of energy.
>> while there are concerns of seemingly inadequate supplyies of oil over coming decades, technology, given a more supportive environment, is likely to ensure the needed supplies at least for a very long while.
>> with oil prices up almost 70% in the last year and with crude rising again today, not all traders agree with greenspan’s optimism. one industry economist says history is on the chairman’s side.
>> in 1874, the geologists of pennsylvania said we’d run out of oil within 10 years. that didn’t happen. we’ve continued to find more than we use so until that changes, we don’t see the peak in sight.
>> greenspan says the transition to the energy world of the future will take time and the u.s., like the rest of the world, will have to live with the uncertainties of the oil oil for some time to come.
>> thank you, peter cook in washington. stocks rose today on greenspan’s comments and a better-than-expected retail sales report.% for more on today’s trading action, we bring in julie hyman from the big board.
>> stocks gained today and the dow jones industrial average closed below 10,000 for the second day in a row. also of note today, volume here at the new york stock exchange exceeded that at the nasdaq, which is a fairly unusual event. that’s due, in part, to high volatility and trading volume due to the expiration of futures and options contracts, called witching. in terms of what gained the most today, transportation stocks led gains after comments by alan greenspan that he still thinks the high prices of oil will be fairly transitory. even though oil closed higher, transportation stocks gained. some of the best performers there, u.p.s., fedex, southwest airlines and c.s.x. financials led some of the gains, a fairly broad-based rally, financials among them, banks also helping lead gains in the session. banks helped in part by wachovia, the nation’s fifth largest bank, which said third-quarter profit rose 14%. it did beat analysts’ expectations. schwab gaining today, up almost 6%, although the company had a third-quarter loss versus a gain a year ago. it had fallen 28% this year before today’s session. also, retailers in focus today after a better-than-expected retail sales report this morning. they weren’t the best performers. some of the best gainers within that index, wal-mart as well as best buy, may department stores and kohls. one of the dark spots today, pfizer fell today after it said its bextra painkiller might increase the risk of heart attacks and strokes in those who have had bypass surgery. i’m julie hyman, bloomberg news at the new york stock exchange.
>> looking at how treasuries finished on the day on friday, first, the 10-year note, we see those notes down one full quarter point, down 8/32, yield up to 4.06%, a reversal from the last three days. the five-year note down .25% -- some currency traders say if the euro can close above 1.25, it can trigger more buyers. up next, investors are concerned about threat 46’ future prospects. you’ll hear from the c.e.o. is saying.
