Don't bury Netflix just yet
Let's hope Netflix (NFLX) executives weren't counting on its announcement about instant movies on your PC to win the hearts and servers of the blogosphere. Because the vaunted voices of the digital brain trust have seen your little idea, Reed Hastings, and they are not impressed. Our Business 2.0 colleague Owen Thomas, one of the Browser's founders, was blunt in his dismissal , saying: "This offering is so weak that Netflix might as well not have bothered." Similarly, the mighty Om Malik suggests that Netflix's movies-to-PC move will "soon be relegated to the dustbin of failed ideas."
The chief criticisms are: Netflix is offering streaming video, rather than downloads, and thus consumers can't copy movies or use them in more convenient ways; only 1,000 titles will be available when the service launches in June; and, in the age of home-surround-sound and mural-sized flat screen TVs, there is a limited market for watching movies on a computer.
Only a fool would pick a fight with people who know as much about the tech biz as Thomas and Malik. But it seems to me that they are calling the game in the second inning. First of all, the list of movies available for streaming will surely grow, and the limits on that growth are coming almost entirely from Hollywood studios, not Netflix. More importantly, these critics are analyzing Netflix as if it were some fledgling start-up that must get the technology exactly right in order to survive. Quite the contrary: Netflix is a nicely profitable company that continues to grow rapidly. In the third quarter of 2006, it added another half-million subscribers, and is now approaching six million customers who send Netflix an average of $16 a month. With that kind of cash flow, the company can easily afford the $40 million it's reportedly spending on the streaming.
Netflix's strategy should be viewed as a five- to ten-year game plan, in which it continues to sign up people for DVDs by mail, while simultaneously helping its customers make the transition to the inevitable digital download market.
And in that game, don't count Netflix out. Like Amazon (AMZN), they are absolutely brilliant at building and enhancing the customer experience. They have an unparalleled database of what kind of movies their customers like to rent, and that database will be just as useful in the digital download era as it is now.
Of course they don't have the technology worked out yet, because the marketplace hasn't decided what the precise path for digitally downloaded movies will be. Netflix's baby-step announcement is a way of saying that they will be a major player regardless of what the final tech setup is. I, for one, would not bet against that proposition.
Netflix seems to be between a rock and a hard place when it comes to movie downloads. I think they are pursuing a low risk strategy with their streaming movies plan that a) doesn't cannibalize their main business and b) doesn't put them in direct competition with the likes of Amazon and Apple. If Netflix's stock were to get a little cheaper and Amazon's more expensive, I think there would be a very strong case for a merger between the two (or rather an Amazon takeover).
Jim is right on most of his opinions on Netflix. The brain trust would rather have us download and watch later? We could wait for the dvd and do that. Why download anything when we can watch it now and totally eliminate the need to store anything locally on hard drives or disks? But you're going to want to watch something over and over? Eventually we will be able to do that by "watching it now" over and over. When it comes to applications and data, storage on the net is hip and cutting edge, but the self-appointed blogger kings think that movies should be stored locally? They need to get with the future.
You are absolutely correct. They have an installed base of users of 6 million. All of which are connected to the internet. They can use this installed base to get into the business of movie downloads. Ask the other movie download companies what their customer base is. I guess their criticism is legitimate for the immediate time period, but with their failure to comment on the future for Netflix shows some shortsightedness.
If they get the system working even marginally well, they'll already be ahead of the competition on the online movie front. Kudos to Netflix for taking their time to get it right. Amazon should be taking notes.
The studios will never go for a rent-by-fully-downloaded-file solution for the PC, for the very reason that it can be copied and played elsewhere, and PC-based DRM solutions are much simpler to hack than, say, something on a set-top box would be. 99% of the time, those who complain about this are thinly veiling a desire to illegally make a permanent copy of the film.
Some sort of set-top solution is still very likely in the future for NetFlix (past job postings indicate this), and perhaps the controlled environment that would provide will allow a download solution to work...but even then, you'd only watch it on the TV.
Face it...for portability, DVD by mail is the simplest solution by far, which is exactly why Netflix is correct in saying that the business model will be successful for years to come. Movies-by-internet is currently only attractive and realistic as an augmentation, not as a self-sustainable business model in its own right.
The winner of this battle will be who works as hard to make the studios happy as the customer, because without studio support, there is no product to rent out in the first place. Tech heads (see: aforementioned closet bootleggers) generally miss, or willfully ignore, this point.
Lately it seems Reed Hastings is the only guy who understands all the variables involved in this business. So far he's batting 1.000 against his doubters...I wouldn't bet against him now.
Netflix's streaming video plan is a reasonable idea given that they already do dvd distribution. This allows their users to have instant gratification at work, the airport, the lunch spot, etc. I see it as a means of providing additional value to current subscribers than winning new ones.
Hopefully Netflix doesn't throttle online accounts like they do with their mail service.
Netflix management is selling the best growth story they can. To be successful 1) studios would have to change 180 degress and free up their best content, and 2) cable and DirecTV would have to disregard the new content as it relates to growing their existing VOD channel. If Netflix doesn't see a better return on $40M with additional customer acquisition efforts, are they saying they have maxed out their customer base?
First let me say that I have never regretted trading the drudgery of standing in a long line at Blockbuster to rent a crappy movie because all the good ones are gone for the little thrill of coming home to find another big red envelope from Netflix containing any one of 70,000 dvd's waiting for me in my mailbox. Once I understood just what they offered I was hooked and have been more than happy with every aspect of their service. As an investor I only wish I hadn't ignored them for as long as I did. I have been in and out of Netflix over the last four years and have done well. Mr. Hastings was quoted several years ago as stating that the key to the future for Netflix shareholders was the downloadable dvd. He made it clear that by far their biggest expense isn't the dvd's, it's the 78 cents they have to spend on every rental for postage. The idea was to make the dvd downloadable, thus avoiding this huge cost component.
So I must say that this latest announcement falls far short of the mark if it is intended to make me want to again invest in Netflix. Streaming a tiny (by comparison) number of movies to my computer is a feature I may never take advantage of, for the same reasons described above.
I wish Mr. Hastings had addressed the goal he spoke of previously, at least to let us know it was still on the drawing board. I envision a means to download the movied onto my own dvd, being able to play it on my laptop or my home tv or wherever it suits me for, say, up to a week, then embedded software would make it destruct, thus rightfully protecting the interests of the movie's owners. I'm not a computer guy but I have to believe that would be doable, and for a heck of a lot less than 78 cents, no?
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