Posts tagged netflix
Netflix, not surprisingly, reported a weak quarter with its first loss in several years. So what’s changed for Netflix in the past few months?
I think Netflix’s problem is threefold: partners, competitors and customers. First, it was obvious Netflix’s original margins were not sustainable in the long run. Netflix secured some of its early licenses at very low costs and it was clear that the content owners would seek more the next time around. So, netflix’s costs have gone up. This is not likely to get better for Netflix. Second, Netflix has more competition now with the likes of Hulu and Amazon and also streaming services being introduced by the incumbents (Comcast and others). This competition will only get worse in the next 12-24 months. Third, customers used to Netflix’s biggest strength in the past. They have delivered WOW consistently. The past year hasn’t been great for Netflix. They have had several missteps, most important of which was the recent debacle with pricing and the spinoff. I think this was the most painful for Netflix.
It’s not surprising that Netflix is being squeezed by both partners and competitors. However, it needs to continue growing its customer base and upselling existing customers in order to address the partner and competitor issues. Going forward, the key to Netflix’s success is to win back customer confidence. Investor confidence and wall street will follow.
Amazon recently announced that Amazon Prime subscribers will have free streaming access to 5000 movies & TV shows. With its existing distribution platform for eBooks and upcoming App marketplace, Amazon clearly wants to rule the market for distribution of all kinds of digital goods (books, music, movies, apps, etc). This is a good strategy for Amazon and allows it to leverage a large user base and its digital distribution assets.
Given the possibility of coupling the digital goods platform with devices and the fact that it already has Kindle, I won’t be surprised if Amazon launches a true tablet in the future as well. Interesting times.
In class, we talked about whether an hour of content watched on Hulu is more or less profitable (for the content owners) relative to the same hour watched on TV. The numbers clearly showed that content owners would rather have the user watch the content on TV than on Hulu. The numbers are not even close.
WSJ reports that NBC, News Corp (Fox) & Disney are pulling a lot of their content out of the free part of Hulu and that Hulu is reworking its business model. This is consistent with our discussion in class.
That said, it is important to note that an hour watched on Hulu does not mean an hour lost on TV. An hour watched on Hulu likely consists of:
i. Some time that substitutes TV viewing.
ii. Some time added to TV viewing because a viewer wants access to past shows.
ii. Some time spent viewing content that is downloaded illegally.
iv. Some time spent on watching a purchased DVD.
Clearly, (i) and (iv) are (based on current economics) undesirable for content owners but (ii) and (iii) are highly desirable. So the net math on the value of an hour of viewing time on Hulu is complicated.
I recently joined a Podcast with colleagues Pete Fader & Raghu Iyengar to discuss the implications of Netflix’s streaming-only service. Some interesting questions that the new service raises:
- The service will undoubtedly bring in new customers. It will also cannibalize premium services. Net effect?
- How will it affect licensing/contracting with content owners? The DVD shipping cycle naturally limits consumption. If heavy users can now consume 20 movies a month for $7.99, would content owners be worried that it reduces the value of their content? (IMHO, they will worry and that it is wrong to do so. The service will help expand the industry).
- What kinds of content will or will not be accessible through this streaming-only service?