Can Netflix Keep Flying?
Heavy Lifting Analyst Notes Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation 4/20/2011
But can Netflix maintain its popularity? While Netflix is likely to deliver good results this quarter, I have some questions about the longevity of the company's business model.
There is no doubt that Netflix's management is extremely sharp. Initially, the company cleverly tapped consumer frustration with the late-fees model of Blockbuster Inc. . It also smartly exploited a technology gap, launching at a stage when the Internet was a viable medium for transactions, but not quite ready for direct video distribution. And now it has transitioned smoothly into a video streaming company, seemingly at just the right time.
However, consumer interest in Netflix is primarily dependent upon two main attributes: a low cost monthly all-you-can-eat subscription; and access to highly popular movies and TV shows. While Netflix would justifiably argue that its slick interface, recommendation engine and efficient physical and digital video delivery are critical components of its success, I think these are ultimately secondary to the excellent content-price equation it offers.
But that equation is dependent upon its being able to source new hit movies and TV shows, the rights to which are mostly held by the major movie studios and TV networks. And Netflix's runaway success is already starting to make these entities think again. (See Showtime Cuts Netflix Down to Size.)
While some content holders are pushing access to their shows out 90 days, others have refused to make deals altogether. Netflix also has an important deal with Starz Entertainment LLC for movie distribution, which is due for renewal soon. The end result might be that it starts to cost Netflix more to offer less. (See HBO: No to Netflix , Netflix to Wait 90 Days for New Starz Fare .)
In addition, the buzz generated by Netflix has made networks and studios look to other players to balance out the market. TV networks and pay TV operators are launching their own online distribution initiatives, and major studio Warner Bros. Entertainment Inc. is offering movies via Facebook. In addition, Hulu LLC is still a direct threat, as are Google (Nasdaq: GOOG) / YouTube Inc. , Amazon.com Inc. (Nasdaq: AMZN) and Apple Inc. (Nasdaq: AAPL).
Still, Netflix is signing up some attractive video content from rights owners, including 20th Century Fox and Epix. Most significantly, it has reportedly outbid Home Box Office Inc. (HBO) for the exclusive distribution rights to House of Cards, a high-profile new political thriller series.
This latest move could be very significant, since it eliminates the TV network altogether. If online distributors can regularly commission attractive video programming directly, then they are no longer dependent on TV networks for distribution rights. This eliminates all the commercial pressure on preserving the pay TV model imposed by networks and pay TV operators, and creates a truly alternative video ecosystem for online entertainment.
But then, can a show distributed only on Netflix become a hit? While Netflix has a substantial subscriber base, it pales in comparison to overall pay TV penetration. Equally important, TV networks have a lengthy track record of being able to cross-promote shows and create hits, while this would be new ground for Netflix. And Netflix would be taking on larger competitors with deeper pockets.
Several upstarts have tried to break up the pay TV value chain, and the virtual bodies of Intertainer, Movielink, etc., are littering the online video landscape. Still, Internet viewing is growing too fast to go back in the box, as Blockbuster's demise has proven. Sooner or later, the video value chain will be disrupted. But is Netflix just a little too early?
- Aditya Kishore, Senior Analyst, Heavy Reading