Friday, March 4, 2011

Netflix's response to headwinds - become ubiquitous

In 1998 Reed Hastings founded Netflix, the lar...Netflix has successfully changed its business model from a pure DVD renter to a DVD renter and provider of (professional) streaming video content. Netflix recently introduced a streaming only subscription plan ($7.99/month) highlighting its intention to, at some point, switch a majority of its business to video streaming, permanently. However, Netflix faces some serious headwinds. Primary amongst these are competition and the increasing cost of acquiring professional content. Netflix has responded to the pressure by attempting to become a ubiquitous "app". It will likely need to do more if it wants to build a sustainable video streaming business.

Competition: When Netflix started streaming video in 2007, competition in the streaming video space was not quite as fierce. Back then there was no Google TV,  Apple TV and Hulu were just getting started and people didn't spend quite as much time on Facebook and Twitter watching video clips hosted on YouTube.

Content: While Netflix scored a major coup in 2008, when it obtained 2500+ titles from Starz entertainment for $25M (the likely market value for the content was $200M+), content acquisition has gotten much tougher since. Content owners learned from Starz's mistake and in a more recent deal charged Netflix $200M/year for content from MGM, Lionsgate and Paramount. Subsequent content deals are likely to be as pricey, if nor pricier.

Netflix acutely understands that to win in the streaming business, it has to both expand its audience and increase its leverage over content owners. Netflix's response thus far has been to expand its audience by becoming ubiquitous  on video streaming devices - atleast in the US. Currently Netflix can be streamed on 200+ devices, including many Samsung and LG DVD players, Boxee, Google TV devices and Apple TV. Of course, the larger the audience, the stronger Netflix's hand in dealing with subsequent content owners - it has few other means of influencing them.

Netflix could improve its industry clout by becoming a more direct part of social conversations on Twitter and Facebook in the US. I.e.by becoming ubiquitous in online culture. Such ubiquity helps in convincing non-consumers to sign up and prevents existing consumers from leaving the fold. It is also defensive - for any number of other video content providers could get to a solid social network integration first and take the conversation away from Netflix.  In the past netflix.com had a community / friends feature as well as an integration with Facebook. While both of these were discontinued, I now hear that Netflix is making a new push for integration with Facebook. To the best of my knowledge, Twitter remains untapped.

In addition, Netflix could target its content acquisition to segments that are not yet served by the other mainstream streaming video players. One example is Indian Americans interested Bolywood fare and soap operas. People in this segment currently use local mom and pop DVD stores or sign up for Indian cable channels available in some US metro areas.

All said and done, Netflix has a chicken-and-egg problem. If it had a large stable audience, it could deal with the content owners. On the other hand, if it had all the content, it could build a large stable audience. Breaking through this loop is not impossible and Netflix is off to a good start, coming off the momentum from its DVD rental business. But Netflix does need to keep spiraling up - get a little more content to get a few more subscribers, and use a few more subscribers to get a little more content.

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Posted by Rohit Dube at 6:00 AM
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