I was at my Dad's house for Thanksgiving, and couldn't help but think about the future of content distribution as I viewed his media consumption habits, which haven't changed in 30 years. My dad still watches the nightly news! To my generation, that probably sounds incredible (it does to me, at least). I mean, I watch the news in real time all day long as I'm online - I'd never sit down to watch a half hour show with fewer details than all the stories I already read about the topics that day. But it gets even better - my dad tapes the news. On VHS. Seriously! How many of my readers have a VCR? If you have a VCR and are under 60 years old, please let me know. This got me wondering if it was even possible to buy an audio cassette tape anymore. I spent much of my youth buying Maxell XLIIs high quality audio tapes to make mix tapes out of on my Sony dual-drive boom box. Can one even buy these tapes at CVS anymore like I used to? But I digress...
Many market watchers are aware that Netflix's (NFLX) stock price has gone babbaloo:
The company now has a market cap nearing $10B, and the stock continues to march mercilessly higher, destroying many a short seller in its wake. I'm one of those guys who wanted to short NFLX, although I currently have no position. I was actually a Netflix customer about 10 years ago, when we had these things called DVDs that they sent us in the mail in a little red envelope. We'd watch them and then send them back by dropping them in a mailbox, with no postage necessary! It was amazing, kids, I tell ya. Nowadays, they're moving onto the Cloud and eventually DVDs will be for old fogies - everything will be streamed via the internet. I thought I had earned my stripes by being one of the original NFLX hard-DVD subscribers, but my Dad is the 5 Star General in the Army of Antiquated Technologies with his nightly taping (not DVR-ing - taping) of the nightly news. My dad reads this blog, and he'll probably send me an email that says "HEY! Why are you picking on me?" I'm not picking on him, I'm just trying to illustrate a point - that my parents' generation is not going to widely adopt the online streaming mechanism for content delivery. They're just not. That probably doesn't matter for these companies - the younger generations will embrace it voraciously - but it's worth noting nonetheless.
Bulls will tell you that NFLX is the future of content delivery. Bears will tell you that NFLX has ample competition (AAPL, AMZN, Blockbuster Streaming, Vudu, Hulu, CinemaNow). They're both right - I think we'll move toward streaming consumption of on-demand content. The question is, why aren't any of the competitors adopting NFLX's pricing model? Let me explain.
I finally got a streaming device - a Samsung Blu-ray player that connects wirelessly to my home network. Within an hour, I had the thing up and running, had logged into my YouTube account, set up a Vudu account and a Blockbuster account, linked my Pandora account, and browsed CinemaNow's content library. What I noticed was this: these guys basically have largely the same content. It's not identical, but the "new releases" were pretty much the same on all three sites. Checking Netflix this morning, I saw that their library was also largely similar, although Netflix looked like it had a better selection of older TV series (The Wire, Dexter, etc).
At first I thought "jeezus, if these guys all have the same stuff, it makes NFLX look even worse, they have no competitive advantage" but I quickly realized the other side of my argument: VUDU, Blockbuster, and CinemaNow all charge in the neighborhood of $3.99 per movie (slightly more for HD streams) for watch-it-now streaming content. NFLX charges $7.99 a month for unlimited content. If they have the same content, it's a no-brainer to go with NFLX instead of the others, assuming you'll watch more than one movie a month.
Of course, content is the battelground - these guys won't always have the same content, that's how they try to set themselves apart. Content contracts cost money, though, and getting exclusive content in increasingly competitive delivery markets probably won't be getting cheaper for these companies. Another issue is the quality of the streaming - I haven't used any of them yet, so I'm not qualified to comment on that, but I welcome reader feedback.
My main question is, will NFLX's competition adopt their pricing model - the "one price for unlimited streaming" model? If not, why not?
My cable company, Comcast, charges $5.99 for on demand movies! That's pretty aggressive, but they have a monopoly on a lot of that content. I can't get it at NFLX, Vudu, etc, right now. Of course, I can wait a month or two or however long it takes. Will the NFLXs of the world pay up for immediate content access? I tend to doubt it - I'd guess that cheaper and slightly slower (in terms of having to wait for access) will prove to be a viable business model, and I look forward to see if any of the competitors will try to offer a one-fee subscription based service.
Karl Denninger has written a few posts about another potential issue with the streaming companies - their increasing dominance in bandwidth consumption, which the internet service providers might push back on at some point.
I have no position in NFLX right now, but I think that my recent Blu-ray purchase which put me in position to consume streaming content makes me slightly more bullish on NFLX's prospects. However, I remain flummoxed as to why their competitors don't try to actually compete with NFLX on price. NFLX currently seems to have a virtual monopoly on what they specialize in - unlimited streaming for a flat rate - and the rate is pretty cheap at that. Can one of the big boys - AMZN, GOOG, AAPL - offer a better product at a better price? We'll watch and see.