As readers of this blog will know, I’ve been very impressed with how Netflix is transforming itself into an online video offering or at least becoming less reliant on its core DVD rental subscription business. In particular, I’ve been pleasantly surprised by the pace at which Netflix has managed to get its ‘Watch Instantly’ streaming service embedded into third-party consumer electronics (CE) devices, including networked Blu-ray and DVD players, Internet-connected TVs, set-top boxes and Microsoft’s XBox 360 games console.
The strategy appears to be paying off, with the company announcing strong Q4 results attributed in part to subscriber acquisitions resulting from the CE partnerships and related marketing and press.
During the Q4 earnings call, CEO Reed Hastings gave further insight into the thinking behind Netflix’s video streaming efforts. Here are some of the key takeaways…
Revenue share with CE partners
“While we don’t pay or charge anything to have our software included in devices we do pay our partners to generate new Netflix subscribers. In other words some of our marketing dollars are going to our CE partners to help create demand for new Netflix subscribers…”
Mix of DVD rentals and streaming is a key differentiator
“Nearly all the CE generated subscribers also rent DVDs from Netflix which really reinforces the importance of the DVD streaming combination subscription.”
XBox 360 deal remains an exclusive games console offering
“We’re in discussions with nearly every major CE company and one by one we hope to be able to broadly cover the Blu-Ray category and the Internet TV category over the next few years. In terms of having our Netflix application included in additional video game consoles we currently have an exclusive deal with Microsoft Xbox.”
Laptop viewing is not an intermediary
“We see the laptop as a significant long term viewing platform not as an intermediate step towards something else and are investing accordingly in continuing to improve our laptop based player.”
Three economic models for streaming
“There are three primary economic models for streaming, ad supported such as Hooloo and YouTube, Pay-Per-View such as Amazon and Apple and subscriptions such as Netflix.”
Roku’s introduction of Amazon Pay-Per-View content
“The downside of our CE partners adding the Amazon Pay-Per-View service is more competition for Netflix but the competition is pretty indirect because of the Pay-Per-View business is in big new releases that we don’t offer on streaming subscription.
The upside is that Amazon will also be promoting the streaming CE devices which provides us more households to stream our service to. Similarly CE companies are adding the ad supported services to their devices. The combination of all of these models will accelerate adoption of video streaming.“
Future competition in subscription-based streaming and how Netflix hopes to compete
“At some point the ad supported companies or the Pay-Per-View companies may decide to also provide subscription like Netflix… We combine streaming with DVD rental and that our large subscriber base helps us afford more content and that we are significantly subsidizing streaming content for the next few years… No firm or model owns an entertainment customer and we think there’s room for us to create a large subscriber base while other firms also succeed with their model.”
No plans to enter the Pay-Per-View market
“Our brand is really about monthly entertainment and subscription and that’s what we’re focused on. So we don’t have any plans to be involved in those markets where Amazon, Apple, Blockbuster and a few others play.”
Two things really stuck out with regards to Reed’s comments and Netflix’s overall strategy. Firstly, the company clearly understands what business they are actually in. It’s not DVD rentals nor online video per se. It’s the “monthly entertainment” business. Secondly, while I’ve been fond of repeating the “content is King” mantra, as music business commentator Bob Lefsetz likes to point out, distribution is also King and this is something Netflix clearly understands. It may not have sufficient licensing deals in place to provide enough compelling streaming content yet, but when it does, it will should have the distribution infrastructure already in place. And in the meantime, DVD rentals by post are doing the job.
All quotes are courtesy of www.SeekingAlpha.com