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Streamed Flix from Netflix

nflx set top boxIn October’s 3rd quarter earnings conference call, Netflix’ CEO Reed Hastings spent a few minutes talking to analysts about the slowly converging worlds of video distribution.  In those comments he expressed three long term goals: “one, to expand the content [they] offer online; two, to make it inexpensive and easy for consumers to view that content on the television; and three, to understand what the financial model for the hybrid service will be in the long term.”  Today, Netflix took a step toward realizing goal number two.

Late Wednesday the DVD-by-mail rental service announced a partnership to bring movies straight to the TV over the Internet.  The new service, which will not be available before June, expands on Netflix’ year old “Watch Instantly” functionality by removing the requirement to watch streams through a computer.

The service will rely initially on hardware manufactured and sold by South Korean electronics giant, LG.   Using a dedicated set top box, or equivalent functionality bundled into a DVD player or other hardware, existing Netflix subscribers will be able to watch free streams from more than 6,000 available titles on their TV.  These streams will be in addition to their regular mail-order rental allotment.

Hastings says the service “is going to be very slick and easy… and not like visiting a website.”  

The one limitation for the streaming (beyond owning the hardware) will be a quota system capping the number of films available per month. The initial expectation is that customers will be able to watch between five and forty-eight hours of programming (a month) depending on the rental plan they’ve subscribed to.  The same quota is currently used with the “Watch Instantly” service.  Unlike competing services, streaming videos from Netflix will not be sold or rented on a pay-per-view basis.

On-demand movies have been a dream of the entertainment industry for decades but no company has yet been able to find the right balance of timing, cost, technology and ease of use to be a true success.  Just the opposite, most have struggled or failed.  Wal-Mart recently shuttered their online store.  Movielink sold out for pennies on the dollar. Both fell victim to poor timing and poorer portability (e.g. both required content be viewed through a PC).  Akimbo and Moviebeam (started by Disney) came up wanting as well.

Among current offerings,  startups Vudu and Building B are hoping they’ve found the right formula.  Apple is still sorting out the future of Apple TV and Amazon is serving up movies through TiVo.

Netflix, for now, may have a better shot at success.   For one thing, unlike competitors the Netflix service does not hinge on selling content.  That means they don’t need direct revenue or rapid adoption to succeed.  Instead, the service becomes both a hook to reduce churn (cancellations) among existing subscribers, and a carrot to entice new customers to sign on.   Also ,by offering programming as a value-added feature they can capitalize on a ready customer pool of more than 7m existing subscribers. The fact that it is free makes for a relatively natural transition.  The combined model is one that keeps customer acquisition costs low.  

Unlike Building B, Vudu, or other startup efforts,  Netflix  also has the luxury of time to adapt and adjust the service.  Because they’re not investing heavily in hardware, and the fact that it’s not (at least for now) a revenue producing product line, means they don’t have to resolve revenue model questions up front. Like any established business, they will easily survive on the income of their existing business.  They can experiment and learn as they go.  From a marketing perspective that’s a significant competitive advantage over other existing services.

Netflix has spent more than $40m developing the library and software behind their streaming service.  For a while, the company was even focused on developing hardware themselves. (Last spring they hired Anthony Wood, founder of early TiVo competitor, Replay TV, to help guide them through the process ).  Going with 3rd party partners will reduce costs and risks.   

Hastings said they “want to see 100 Netflix enabled devices on the market.”  That wouldn’t be possible with any other approach.

The set top hardware is expected to begin shipping sometime in the second half of 2008. There’s no initial word on pricing though there is some speculation that there may be some subsidies for early adopters to help seed the market.  Competing set top boxes from Vudu and others run between $200 and $400.

The announcement of the service was well timed to capitalize on the building buzz for next week’s Consumer Electronic Show.  It also pre-empts a widely anticipated announcement from Apple that they will begin providing movie rentals through iTunes.  (That announcement, which is reported to include films from both Fox and Disney, is expected to be made at Macworld later this month.)


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