Wednesday, February 25, 2009

The Motley Fool wonders "Is Netflix Doomed?" Or, at least, their readers do. Tim Beyers tries to convince the wary that Silicon Valley is all talk until the tech is at the consumer's reach on a broad scale, and that the DVD-by-mail business is hardly dead.

Fortunately (for me), the technology is here, by and large, even if it's not being embraced as widely as the fringe would like you to believe. Streaming video is a Godsend for people like me who A) aren't hardasses about video quality, B) care more about timing and avoiding commercials than catching the latest episode and C) have the hardware on hand and know how to use it. Category C is growing leaps and bounds each day, as we're all well aware. As more people naturally migrate to hardware with the capability to use streaming video (broadband enabled televison, Xbox 360, etc), people will naturally migrate to using the services, just like they did with HDTV. Feedflix just released stats projecting 2009 to be the first year that streaming video overtakes DVD by mail at Netflix (note: you'll still have to take this with a grain of salt, though, because it appears to count individual episodes of sitcoms as a title, so when I watch all 24 episodes of Season 2 of 30 Rock, Feedflix reports that I watched 24 "movies").

So even if we assume that DVDs are and will continue to be alive and kicking for the next decade, the question remains, can Netflix survive the transition to a market that prefers streaming to receiving and returning DVDs by mail? There is obviously demand for the services. 10% of Netflix's subscribers have watched from an Xbox. What percentage will be watching from broadband enabled Samsung and LG televisions when every TV on the market has broadband? The rub will be if we see the dollars follow subscribers. One of the hurdles for on-demand media is licensing agreements which stipulate that fees are incurred each time a video hits a pair of eyeballs. Buying a copy of Groudhog Day on DVD probably costs $10, and each disc will last for, for simplicities sake, 10 rentals in it's lifetime. How much does Columbia charge Netflix in licensing each time I want to watch Groudhog Day? More or less than the $1 (plus shipping) that the DVD would have been? How many times do customers start to watch a movie and get five minutes in and decide that they don't want to watch it? Are there fees incurred here? Last night I started Radio Days and got ten minutes in before I was totally interupted by the Wife who wanted to talk or something. Did I cost Netflix money? In my opinion, cost is probably the biggest uncertainty in this equation when you assume (as I do) that the demand for this type of service is absolutely huge.

I may sound as puffy as Silicon Valley, but the day that almost everything you watch is available on-demand in your living room is right around the corner. Streaming everything available on network television is only an extension of the concept of an HTPC or TiVo, which is practically standard with any cable TV subscription (Time Warner charges $10/month extra). HBO is in talks with Netflix as we speak working out deals (fingers crossed) for preminum streaming content, and Netflix already streams limited Showtime and Starz content. Hulu, CNN, YouTube and others are already available in the living room if you're willing to fiddle with an AppleTV -- and we've all witnessed that the step from kids making smart shit into capitalist cash cow is a small one. Media delivery is in for a hell of a ride over the next ten years as broadband penetrates the long tail of consumers. With no content-specific boxes or cables necessary, the global potential is unlimited. Some Motley Fool readers can continue believing that Americans want the security net of "ownership" (which I can relate to, but only in re: books -- I will never buy a Kindle), or that somehow people dumping shares is a sign of inherent weakness in the business model (never trust a technical analyst, I don't see any dips since Nov/Dec 08, and it's picked back up to $32/share today), but the fact of the matter is that the model appears to be strong, and as it stands Netflix is in the lead.

*Also, what is going on with the love for Redbox? It looks like garbage: a Blockbuster in a vending machine is still a Blockbuster, and the DVD-by-mail model is lots more convenient, right? I'm a snob, though, so if I can't rent Breathless from your vending machine, you can kiss my ass.

2 Comments:

Anonymous farmfresh said...

redbox is only popular because they are in grocery stores. if you had to go to a separate location for the same crappy selection it would not work. also, it works because going to the movies is so damn expensive. why pay $10/ea to see a crappy movie in a crowded theater when you can pay $1 to watch a crappy movie at home in your underwear.

as for netflix, i think it's still alive and well. since they offer streaming video and physical disk delivery, they can essentially keep the same business model. as your need for online content grows, your need for physical disc delivery (and the overhead costs of discs and shipping associated with that) will necessarily decline. one can only consume so much content.

my 3-at-once plan will ship fewer dvds per month as i watch more content online, but i'm still paying a premium price for the physical discs that i'm no longer receiving regularly.

what i think you'll see is the same business model with a slight pricing adjustment. "unlimited online content" will come free with a premium (ie. more than 2-at-once) delivery plan, while the 2-at-once 1-at-once, and 1 per week plans will come with limited online viewing.

people are used to paying ~$12-$20 a month for netflix, and so long as the selection doesn't decrease people will continue to do so whether the content is delivered online, or in the mail.

so even though netflix may be delivering more total content, the money they save through a reduction in media and shipping costs could pay for the increased licensing fees.

and as for licensing. netflix has done almost as good a job as apple in making it very difficult to capture or reproduce their online stream. i think a movie studio should be content with one or two pennies per view royalties (and you'd be able to get more views from online content than from physical dvds) the same way that music studios are, for the most part, content with pennies per song royalties from itunes.

also netflix needs to be smart enough to demand those kinds of concessions since they're the monopoly in the business. movie studios cannot set up a competitive alternative to netflix and charge more money for it, (itunes proved this) so they either lose online revenue *and* dvd revenue through netflix, or they capitulate to netflix's demands.

i'm not sure the concept of ownership will/has changed either. the people who value ownership will still value ownership. i have netflix and still have several hundred dvds. the fact that there wasn't a real choice of ownership before just meant that $20 for a dvd or vhs wasn't a true reflection of the market price. and now that i can get unlimited online content for $20/mo i just don't buy as many $20 dvds. i almost always buy $5 or $10 dvds on special.

itunes made honest consumers out of millions of people who didn't value ownership and pirated mp3s simply because it got rid of the "studio album for $20" structure that never really represented the true market price or demand for the entertainment. i think netflix streaming video will do the same for tv and movie content.

10:50 AM  
Blogger Ben Shepard said...

"my 3-at-once plan will ship fewer dvds per month as i watch more content online, but i'm still paying a premium price for the physical discs that i'm no longer receiving regularly."

I am doing the same, partially out of laziness in sitting down and figuring out how many physical DVDs I actually need now that I'm streaming more than I'm getting through the mail, and partially because the on-demand selection isn't quite where it should be yet. The "online only" plans that every tech blog was reporting rumors about last week got debunked a few days ago, too, which makes sense. The selection isn't there to "delight," as marketing departments like to say, the customers, but also there probably is a lot of work to be done determining what this is worth to the customer.

I think that the reason iTunes doesn't give me butterflies like it seems to everyone else is that I'm a bigger fan of the subscription based model, even when it doesn't deliver 100% of what you hoped for. I always wanted to go get one of those Sansa music players with Rhapsody for exactly that reason. Similarly, I'd pay a monthly fee for Pandora. Paying for a dozen mp3 files, however, doesn't do it for me. To each his own, though.

9:22 AM  

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