Thoughts on Netflix's Expanding Video Part 2

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Thoughts on Netflix's Expanding OTT Streaming Video Service, Part 2
Internet Hounds at the PayTV Doors

Colin Dixon, Director of Broadband Media StrategiesMichael Greeson, President and Principal Analyst

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October 8, 2008In the first part of this opinion piece, we discussed the impact of Netflix's Over-the-Top (OTT) streaming movie service would have on Blockbuster. This current essay discusses the impact that the Netflix OTT movie service will ultimately have on PayTV operators and their Video-on-Demand (VoD) efforts.

Recap - The Evolution of the Netflix Streaming ServiceHere's a quick timeline of recent Netflix activity related to the streaming service:

• January 2007 - announces the launch of an online video streaming service with some 10,000 titles, each of which can be streamed for free to your PC if you're already a Netflix mail-order DVD service subscriber.

• May 2008 - announces that these 10,000 titles could be streamed for TV viewing using a $100 Roku-manufactured WiFi-enabled set-top box. As with the PC streaming service, existing Netflix DVD-by-mail subscribers would receive the TV streaming service for free. At that time, Microsoft and LG were rumored as potential distribution partners.

• September 2008 - announces agreements with CBS and The Disney Channel to bring first-run series such as CSI, Numb3rs, and Hannah Montana to the Netflix streaming service both to the PC and the TV via the Roku set-top box. With these additions, the Netflix library grows to over 12,000 titles.

• October 2008 - announces agreement with Starz Entertainment to make 2,500 movies from the Starz Play broadband subscription movie service into Netflix's streaming library but again only to the PC. The content includes recent movies such as Ratatouille and No Country for Old Men, movies available on the earlier pay-per-view release window, thus significantly improving the quality of content available, having before been restricted to older titles. As well, LG rolls out their Netflix-enabled Blu-ray player.

TDG believes that this rapid evolution of the streaming movie model, especially when combined with Netflix's installed base of some 8.6 million subscribers, gives the Company a leg-up on its primary competitor, Blockbuster. But the threat posed by this service doesn't stop there.

Traditional TV Models Under Threat As WellIt is probably a good bet that most Netflix customers also subscribe to some form of traditional PayTV service that offers VoD. It is also likely that a good percentage of these consumers have subscriptions to premium video services like HBO or Showtime. To date, this combination has helped drive PayTV revenue per subscriber (ARPU) to record levels.

But if Netflix can offer a video streaming service with a sufficient array of TV and movie content, all delivered over a broadband connection, the motivation to pay for extra channels and premium services through your local PayTV operator is diminished. Yes, these services do offer exclusive content, but at what cost? With cable refusing to embrace a la carte offerings, Netflix's streaming service becomes a very attractive alternative for those seeking to reduce their monthly expenses and still have access to a diverse assortment of content that may be sufficient for their needs. The challenge is in determining at what level the content assortment becomes sufficient to pull customers away from traditional operators. At the current pace, it won't be long before a number of OTT players, each with different answers to the sufficiency question, will be chipping away at incumbent audiences. Even some of the newer TV companies should have pause for thought.

Take TiVo, for example. As a loyal TiVo user, the Netflix service might make me think twice about whether or not to keep the service. First, in addition to paying TiVo for the service itself, I have to pay additional one-off fees for all the near-on-demand content supplied by Amazon Unbox. Not so with Netflix, as the content on ‘Watch Now' is free with my mail-order DVD subscription. Second, with a lot of first-run shows now available on-demand from Netflix I no longer need to record them on my TiVo. I'm not suggesting that Netflix is a substitute for my TiVo, but there is no doubt that it erodes some of the key values of using a PVR.

Not A Replacement for TV...YetGiven the vast selection of programs available through traditional PayTV operators, for most consumers Netflix's library of content is currently insufficient to replace these services. One reason is its lack of HD quality. Given the inconsistent speeds of today's residential broadband connections, it is problematic to deliver a sustained HD-quality video for the length of a TV show or movie, particularly at peak usage times. And with the usage caps that companies like Time Warner are introducing on their broadband services, watching a lot of streamed HD video will end up costing you a great deal in overage charges (perhaps the real reason for the caps in the first place!).

Another reason why the Netflix service is not yet a threat to PayTV operators is its dependence upon third-party hardware - in other words, consumers must own or buy a Roku box, an Xbox 360, or an appropriately configured CE platform such as the aforementioned LG Blu-ray player. Unless you own one of these platforms, you're stuck watching the Netflix streaming service on your PC. Remember, when it comes to PayTV services, it is the operator who usually subsidizes the cost of the set-top box. In the Netflix scenario, the consumer must pay the retail cost of the box.

Then again, if Netflix continues to add enabling platforms, it avoids relying on the success of a single platform (say, the Roku box) but instead rides on the diffusion of other more pervasive platforms such as the Xbox 360 or even a traditional DVD player - talk about smart!

It's not that the Netflix streaming-to-the-TV service will immediately topple PayTV VoD services; and no sane analyst would advance that argument. However, anyone that denies that such OTT movie services will soon begin to chip away at incumbent audiences is dangerously naïve. Remember, Sony has promised that 90% of its consumer electronics will be network-enabled by 2010 - imagine every CE platform being capable of receiving a Netflix movies-on-demand service at no extra charge above the monthly DVD mail service fee. That's a powerful combination that will increase both the DVD-by-mail subs and the number of streaming-to-the-TV movie viewers.

At the moment, the Netflix streaming services offers an excellent supplement to more traditional video services. Over time, however, it will evolve to become much more.

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Colin Dixon is TDG's resident expert on OTT and Broadband Media trends. Some of his reports include:

Bending the Rules of Time and Space: Trends and Analysis of Place Shifted Media

Broadband Video: Redefining the Television Experience

Michael Greeson is TDG's President and Principal Analyst. Some of his work on OTT and Internet video includes:

Attributes of a Successful Online Movie Download Service

Consumer Receptivity to Web-Enabled DVD Features

ENDS

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