Is Netflix Coming Our Way?

By Alex Street

The nature of competition in pay TV markets could be about to change. Internet-enabled TVs and connected devices represent a fundamental change to the way content is distributed and markted to the viewer. I’d like to address these issues by looking at one company’s attempt to build a hybrid distribution strategy that capitalizes on the growth of internet-enabled devices connected to the TV set.

Historically, a single TV platform has been in control of the viewer experience in the home. If I was a Sky customer, Sky controls everything interesting to do with TV in my home. In fact I pay them to do so. The arrival of video on demand products on Blu Ray, games consoles and internet TVs challenges this control. For example, quite soon, in my home, when it comes to watching movies or catch up, I’ll have a choice of platform at the point of decision. In other words, instead of picking up the Sky remote, I’ll have several remotes all competing to deliver me the same thing and or similar things. I will no longer be limited to the TV platform I subscribe to. This puts device manufacturers in direct competition with pay platforms and this isn’t a challenge one American company seems to fear.

Netflix started out as a simple movie rental company that delivered your DVD rental by post. However, as the company name suggests, they never saw themselves as being simply pigeon holed into just offering a postal service. Netflix has an advanced hybrid distribution strategy taht uses the open web to deliver movies to the viewer. Netflix is now available on games consoles (Xbox 360, PS3 and Wii), BD-Live Blu Ray players (Samsung, LG and Insignia) and internet TVs from LG, Sony and Vizio. Netflix is also now available on the iPad. This strategy puts them in direct competition with US cable and satellite operators. Netflix claims that by offering streaming cross-platform streaming options it can drive premium subscriptions and tap into the $66b US home entertainment market. At the end of the first quarter, April 2010, Netflix reported it had 13.9m subscribers, representing 35% YOY growth. This is expected to hit 16.6m by the end of 2010, a 400% increase in subscribers since 2005. Graph 1 shows this rapid increase in Netflix subscribers, in the context of the number of US DVD households and movie goers. As graph 2 illustrates, this expansion has been partly driven by a more competitive subscription rate, with average fees falling from $17 to $12 a month.

In order to tap further into the lucrative home entertainment market, Netflix has to drive online streaming and attract more pay TV subscribers. Firstly, Netflix is already driving more users to stream online. More than half – 55% of subscribers – now stream movies and TV shows from Netflix over the internet. Graph 3 details the average number of movies streamed compared to the average number of DVDs shipped to each subscriber, each month. In terms of the total volume shipped and streamed, Netflix believes that streaming will surpass postage as the primary delivery format for movie rentals within 2 years. Conceivably, much of this will be driven by an expansion in the base of the devices that can be streamed from. Secondly, in order to grow its subscriber base Netflix is offering TV shows in order to attach cable subscribers. This puts Netflix in direct competition with US cable and satellite operators who have combined subscriber based of around 105m. Increasingly these operators are also offering VOD products on multiple screens in the home. However, the domestic market isn’t the only way Netflix is looking to grow. Netflix will launch in a foreign market later this year. Moreover, a readily available distribution base exists in the games consoles and BD-Live players, by virtue of their international manufacturing standards and global brand presence. This is not an option open to domestic cable and satellite providers who have sunk costs.

All in all, the online streaming market is there to be colonised. Netflix is one of the first companies to develop a hybrid distribution strategy on this scale. We’re going to have to get used to the competition at the TV screen and develop ways to deal with it. Essentially, there’s a functionality rush occurring on the TV set and it’s not simply a question of the best, most commercially viable and economic way to distribute content, it’s who can offer the most compelling user experience.

Download the original article from NMA, here.

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