Mixed Signals

Netflix: New Media Meteor or Quickly-Aging Star?

1/07/2013 10:16 AM

Campbell Calif.-based Netflix has, within just a few years, become a multichannel media powerhouse, with more than 30 million stated customers. The publicly-traded company’s story is one of those rare ones that whizzes by on that ultra fast universe that is today’s – and will be tomorrow’s -- “new media.”

This article highlights the one physical and streaming media video provider that has tripped once or twice, but ultimately has, since early on, gotten an awful lot of things right. As such, Netflix is clearly in the game and among the top players. Netflix’s key potential digital media competitors include the likes of Google, Apple, and Microsoft. Recent visits to these new video distributors have provided the basis for this, the first, of several similar Multichannel News write-ups.

Strengths

Netflix today has the top spot among the best known and most used online video – or as it is also rather inarticulately referred to as, Over-The-Top (OTT) – providers. Its U.S. base of users is split between subscribers and users, with nearly 9 million in the former category and 16 million in the latter, as of Q3 2012. Netflix has done an exemplary job of building its brand, as one of the U.S.’s two or three foundational streaming video services. One of its key achievements has been its ability to deliver its movies and older TV shows to just about every mainline connected device.

Netflix also offers its incumbent DVD rental service by mail, and the company strives to have both the DVD and streaming services cross-fertilize and support one another.

Internationally, following a rather successful 2011 launch into Canada, Netflix now boasts more than two dozen other countries that offer Netflix content, mostly via Internet streaming services. As such, other than another of Netflix’s Silicon Valley rivals, Apple, Netflix has the largest global video footprint. Like on screen video rival DirecTV, the Netflix ability to grow its international footprint is an item many future stock pickers will factor into their Netflix buy/sell decisions.

Challenges

Some believe that one of the core obstacles that Netflix struggles with -- i.e., its inability to link with other content sources, such as whole-home networks, traditional live/linear TV, and music -- is exactly the kind of obstacle that TV newbee Intel’s new in-home TV service will solve. Whether Santa Clara, Calif.-based Intel has worked with Neflix, its neighbor across the Silicon Valley, to achieve this solution may have a lot to do with both providers’ future success.      

Other critiques of Netflix include a less than first class content catalogue, although the recent alliances with the Disney and the Warner Brothers organizations, and forays into new in-house produced series such as House of Cards, are intended to address these apparent failings. Underlying everything it does, Netflix also struggles with the large content licensing fees it now pays to studios that may more and more limit Netflix’s (and others’) access to their content. Shaky margins for Netflix’s streaming services, as streaming slowly overtakes physical distribution, is yet another concern.    

Moreover, as an industry subsector, Netflix struggles with revenues lost because paying users share their accounts with other non-paying users. Unless and until Netflix can get a handle on this inherent technical dilemma, hundreds of millions in potential future revenues will be left on the table.            

Most importantly, however, is the largest concern Netflix must overcome to truly sustain longer term new media legs: a sustainable business model. Competition in and around the online video space is brutal, and bound to get more so. Rival services from cable operators, as well as those from key players such as Hulu Plus and Amazon Prime and AppleTV, mean lots of future strategic decision making will be spent to add new Netflix features, differentiation, and value.   

On Christmas Eve, Netflix’s problems with its in-house Content Delivery Network (CDN), continues to raise questions about the entire industry’s ability to adequately serve end-users in the future. After all, especially with the increase in bits pushed and pulled to and from all those mobile devices, a lot of change in the CDN business is ahead.  
 

Other Points

Netflix today claims more than 100,000 titles among its library, however, only an estimated 20,000 titles are available online. Rolling into CES 2013, Netflix also claims the greatest access to consumer electronics devices, with nearly 800 listed. Late 2012 revenues are approaching $3 bil., with profit in the same timeframe at $734 mil.  

2,400 employees populate several facilities in Campbell, San Mateo, and the greater Silicon Valley areas, as well as points further. Netflix’s publicly-listed bouquet of serviced countries also includes, alphabetically, Denmark, Finland, Ireland, Norway, and the United Kingdom. In addition, like DirecTV, Netflix has a new presence in Latin America that exceeds anything that is now possible, growth-wise, in the U.S. Latin America has roughly 400 million inhabitants, about half of whom are expected to move into the so-called “middle class,” in the decades ahead.           

Current Netflix prices for a buffet-like streaming include a base of $7.99/month, as well as physical DVD prices of one disc at $7.99, 2 discs at $13.99, three at $16.99, and four at $23.99. $16/month, provide subscribers with an attractive combination plate of physical and streaming video.

Summary

In a December 10, 2012 article in Seeking Alpha by Paul Zimbardo (See, http://seekingalpha.com/article/1056041-will-disney-save-netflix), he does a good job of articulating several of these Neflix pros and cons, also touching on a topic that has been rumored about for years, which is that of Netflix’s ability to remain independent, and away from the clutches of a Planet Google, a Planet Apple, or a Planet Microsoft.     

This will likely be the real energy that defines Netflix’s continued shining brightness.  

Jimmy Schaeffler is a telecom author and chairman/CSO of Carmel-by-the-Sea-based consultancy The Carmel Group (www.carmelgroup.com).

 

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