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Sunday, November 28, 2010

Netflix and the Paradigm Shift in Media Consumption

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.
-KD

35 comments:

Tahoe said...

great piece, insightful, timely, and well scripted. Thanks very much!

Anonymous said...

Isn't HuluPlus also unlimited streaming at $7.99 a month? From what I understand, they have a better selection of current TV content vs. Netflix but a poorer movie selection.

Wrt stock, the issue is not whether it is a good/great service with good prospects - but whether the price reflects all of that and some and none of the potential risks. I think so.

Kid Dynamite said...

Anon -
sorry - I didn't cover HuluPlus - i can't get it on my player. Good point.

You'll notice I completely avoided NFLX "valuation" which you addressed in the second paragraph. That's because any valuation relies on a vast number of assumptions about future subscriber growth and maintenance - which is why I was trying to take a more broad overview of that topic.

so, of course NFLX looks expensive on current metrics. It may even look expensive if you factor in continued growth - but if they become the default distribution method for the next generation, it may not be expensive. Which is why I was trying to consider their prospects without delving into detail - WILL they become the default distribution method? I agree that there are LOTS of risks, and lots of potentially capable competitors.

Dad said...

If you search on Amazon for "audio tapes blank", you can find all of the blank audio tapes that you could want.

Brian said...

As of right now, NFLX's content is atrocious. Think of your favorite movie in the last 5 years, search for it on nflx streaming, no chance you will find it.

On roku it goes like this....search for movie on nflx, fail, switch to Amazon On Demand, find it, pay amazon 3.99+

Only movie I've watched on NFLX streaming I liked was Big Labowski.

If they don't get their content deals done soon, I'm switching to hulu+ / redbox. I heard rumors of a big deal going down a few months back but nothing has changed.

Disclosure - waiting to short NFLX

Kid Dynamite said...

Brian and others - i was just having this conversation with a friend of mine: why can't i get Amazon on Demand on my Samsung BluRay player? Amazon would clearly like to deliver content to me. Is it a condition in the contracts of NFLX or others that if Samsung utilizes their content distribution, then they can't use Amazon, for example? I know there is a sony machine that gets NFLX and AMZN, but not Vudu, so I can't imagine that's the case...

why no Amazon streaming on my DVD player (or Hulu, for that matter)??

Brian said...

I don't know why you can't get AOD:

http://blogs.consumerreports.org/electronics/2009/10/samsung-blockbuster-video-streaming-service-amazon-internet-movies-online-bluray-high-definition-players-videoondemand.html

Also interesting about NFLX:
http://www.techdirt.com/articles/20100419/1140369080.shtml

http://finance.yahoo.com/q/it?s=NFLX+Insider+Transactions

Brian said...

not sure why you can't get aod:

http://www.amazon.com/gp/video/ontv/samsung

Anonymous said...

Son,

The selection of pre recorded VHS tapes are dirt cheap and endless... at any neighborhood yard sale.

Stock up now!

-H.R. Dobbs Dad

Anonymous said...

> 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?

laughed at this. how old are you? i'm 46.

Brian said...

here you go, its amazon's fault:

http://forums.cnet.com/7723-13973_102-395557.html

also note nflx insider selling recently:
http://finance.yahoo.com/q/it?s=NFLX+Insider+Transactions

Kid Dynamite said...

brian - thanks for that legwork. I'm shocked that AMZN hasn't gotten their ass in gear and made it easier to watch their VOD content. I don't get it....

I feel like AMZN and GOOG are spread too wide on too many different projects. If either of them put their mind to it, they could destroy NFLX - it would seem.

Anonymous said...

did some modeling,

It cost about $0.20 to stream a 90min HD movie.

Based on $200m licensing fee for current library and that the average watches 16 movies per month, NFLX will be more profitable with their unlimited streaming plans. Mgmt also indicated that customer churn for streaming plans is lower.

NFLX is screwed if their average customer watches 36 movies a month (1 movie per weekday and 4 over the weekend).

But current library sucks, so that's unlikely to happened.

NFLX needs to acquire better content and that will make the low price $7.99 unlimited streaming
plan unsustainable --- subs watch more with better content.

So yeah, the $7.99 price point is definitely a reflection of subpar content. The price point will start to rise when NFLX acquires better content.

scharfy said...

bottom line:

first run content will never subject themselves to Netflix style discount pricing. thus, netflix's content quality will always suffer, as good as a concept as the distribution may be.

He who pays the piper calls the tune.

Pay per view will still be here 500 years in the future..

The other bottom line:

Don't fuck around with Andre Johnson.

Anonymous said...

Still using VHS to tape a few programs. Works great. Maxell blank tapes are readily available. And yes, I am under 60!

Anonymous said...

The reason why NFLX are able to offer unlimited streaming is that NFLX is prepared to write a big check upfront to license the content from rights owners---$200m per year for 5 years for the Starz deal.

Amazon, CinemaNow are basically distribution platform --they sell the content and and pass-through the revenues to rights owners(after taking a cut).

So you can see that NFLX is more like a cable channel and Amazon, CinemaNow more like Walmart without the inventory.

So yeah, all are doing online streaming but with different business model.

Kid Dynamite said...

Anon @ 4:22 am nails it. duh - of course - I don't know why I couldn't explain that. Thanks for that clarification. Also, it's widely known that NFLX basically picked off STARZ on their last contract, and the renewal will cost NFLX much more.

anon re: MAXELL tapes: I'm actually surprised they're readily available - I would have thought that analog audio was an even more antiquated technology than analog video.

Anonymous said...

I use Netflix DVDs for the enormous library relative to their streaming. I consider the streaming to be a plus to the long tail offerings from Netflix. I pay $ for the DVDs.

ps I'm old, so I need less formulaic stuff. Did you and Lady Dynamite see Terribly Happy or $5 a Day, yet?

pps Watch the TV news for any other reason than to wonder what the citizens are being spoon fed? Bwaahahhahah!!!!

ppps Over the holiday I heard from my Bro-in-law(this is reliable) that Lehrer Newshour is stuck in radio mode due to a top heavy staff of 70 year olds with no kids, no life, and no intention to leave.

BigShow said...

I'm actually surprised you spent money on DVDs. I love the show Breaking Bad(Top 5 show right now), but I can't imagine ever buying another DVD. I can't remember the last time I went into my drawer of 150+ DVDs and watched one of them. Just subscribe to Netflix and have them send the DVD to you if they don't stream it yet.

vegaskev said...

As bad as NFLX is for streaming content in the US, come to Canada and get screwed over even more.

Canadian content is part of the issue. The other is that the broadcasters in Canada buy not only broadcast rights but also distribution rights. Therefore, any American show sold to a Canadian network will not be available on NFLX Canada unless they are willing to sell it. Since the "major" Canadian networks have their own on-line viewing capabilities, it seems unlikely that Canadians will see a majority of the content Americans can see.

Sometimes I wonder if the only reason to stay in this country is for the free health care...

However, I still have a subscription because it's only 8 bucks. Watch two movies and it pays for itself. I just wish it was streaming 5.1 sound.

PS: I still have cases full of recorded mixed tapes on Maxell XLII's. And I gave 200 movies on VHS to my 60 yo+ parents to sell at their church rummage sales. They got at least a buck for some of them. $5 for Showgirls!!

Peter said...

Under 60, still taping the local evening news, primarily for the weather (their explanation of the "why" is still better than the web). I'm close enough to Boston to get 12 (mostly HD) channels over the air with a set-top antenna. Yes, I did get a modern TV, but still use a VCR and converter box to time-shift.

Look, I'm old enough to resent having to pay for basic TV. Geography prevents me getting satellite TV, and even local-only cable + DVR would run around $40/month.

Anonymous said...

you can get netflix (us) in canada using an IP spoofer like usvideo.ca. I just did it and now enjoy netflix.com on my wii in Ontario. This is not spam; just another angry old man tired of cdn content rules and "the man" giving me the BOHICA (Bend Over, Here It Comes Again).

Hammer Player a.k.a Hoyazo said...

OMG somebody who actually videotapes the news for the weather. That may be the single saddest thing I have read in this short week so far.

Brian said...

Just saw this on Denninger's website:

http://finance.yahoo.com/news/Level-3-Communications-Issues-bw-346802933.html?x=0&.v=1

KD how do you get your internet up in BFE? Would you switch providers if they start blocking/charging for NFLX,Vudu or AOD?

Kid Dynamite said...

Brian -
I saw that post on Denninger's. It's exactly what he's been saying would happen, and it's the beginning of the bandwidth pricing wars.

I think Comcast went about that HORRIBLY. If they actually said what LVLT claimed they said - that they'd charge LVLT more for streaming, then they come off looking like the bad guy. they should cap and charge bandwidth PERIOD - not specific kinds of bandwidth.

as for me, I'm hosed. I have comcast, and no choices. I can't even get an over-the-air antenna - I'd be lucky to get PBS from 40 miles away. I'm Comcast's bitch. I looked into trying to reduce my bill, but i didn't really have any options. Amazingly, they have me over a barrel.

I basically pay $45 for internet (good, fast) and $95 for cable including HBO, MAX, STRZ, SHO. I could dump the movie channels and save $25 a month, but after adding NFLX for $10, it's not a big savings. totally hosed.

Anonymous said...

So about a year ago I'm having dinner with my 20-year old, college junior son who's come home to visit with his dear old dad. I ask him what he and his buddies do in their spare time these days, and he says that, among other things, they watch Netflix movies. "I didn't know you had an account" I said. He replies that he's had one for the past 10 months and that every one of his friends has one. I asked why Netflix. They like to be able to stream to their phones, ipods, and TV's with the same service and the cost is fixed each month. "Everybody does it". So I buy the stock the next day and it's up 5x in a year.

Least week, I asked my 85-year old mom what she wants for Christmas . "I'd like a Netflix subscription---they have all the old shows I used to watch". So Mom, do your other friends use Netflix? Why yes they do--that's how I heard about it.

I'm buying some more Netflix tomorrow

Kid Dynamite said...

really Anon? Your 85 year old mom uses NFLX? Tell me she's streaming NFLX content and I'll be really impressed!

Anonymous said...

Kid:

She's streaming. It's one of those flash signals (like my son's) that says there's a new market segment opening up for Netflix and it's older folks who can now get to that nostalgic, rusty old content that they can't find anywhere else. And they don't even have to get up to insert a VHS diskette (my mom has hundreds of those as well).

Kid Dynamite said...

I'm shocked. I am still pretty confident in my claim that 85 year old grandmothers are not going to be a big demographic for NFLX's streaming plan.

where does your mother live?
what device does she access NFLX streaming through?

Seth said...

Competitors probably don't compete on price because you can't make money in the long term at those prices.. netflix used to get all it's content on the cheap.. now that it's gaining attention, content providers are going to charge a lot more, just look at the EPIX deal..

Anonymous said...

Kid:

She lives in South Carolina in the same home she's had for the past 50 years. I will say that she is probably an outlier in this context; she also surfs the web with a laptop every day, reads the Drudge report, watches Fox news every night, forwards emails with sappy jokes and thoughts to friends, etc. But she also now streams Netflix on a $125 blu ray player that links to a wireless network and maintains that a number of her older friends do it as well. I wonder how big that market segment is?

Kid Dynamite said...

wow Anon. You should consult with her and start a Facebook for the Elderly... or even better - Grandma's Groupon! (did you see that Groupon is in talks to sell itself to google for $5+ BILLION dollars - after only a few years? unreal)

I have no idea how big the "techno-savvy grandma" market segment is. probably not very big.

I'm willing to bet that even awareness of the meaning of 1) Netflix 2) Streaming media or 3) wireless connectivity is extremely low amongst that segment.

Your mother is at the top of the octogenarian tech pyramid

Anonymous said...

The problem for NFLX is that most of their streaming movies are really old ones. I signed up a few weeks ago, glanced at what they offer, and decided to cancel. Most of new movies are only available through DVD,

Anonymous said...

Hopefully by now you all KNOW why netflix has had a low price....it was only to gain as many as customers as they could before the net meterering/tolling of data came into play. its NOW in play and you are witnessing the realization that people like Denniger have pointed out- that the Netflix Streaming Movie plan is seriously flawed in the end and can't last. NFLX will be 100 in 12 months easy as people wake up

Oren Jacob said...

We bought our parents (early 80's) an Apple TV. The usage over the past month has been 100% netflix.

And yes to the comment up above about different business models. Netflix is the video store of the online world. Amazon, iTunes, and other pay per view sites are the movie theatres of the online world.

Content releasing windows online already exist that mimic the old brick and mortar release windows with pay per view first (esp. iTunes) and netflix later.

As it should be.

For content owners, you want to monetize on pay per view first and then on a shared-rental agreement later.