Among several innovations directed toward the industry’s smaller operators spotted at last week’s NCTC Winter Educational Conference in Charlotte were over-the-top video interfaces in one of Evolution Broadband’s set-top boxes.
In addition to a working collaboration with TiVo, Evolution was demonstrating applications for streamed content from Amazon and Netflix. The idea is simple: For small cable operators who have not deployed the industry’s facilities-based VOD infrastructure, these services could empower their subs with a host of on-demand options.
Leaving aside Evolution – and Amazon, TiVo and the NCTC – we turn now for a closer look at Netflix and share the following note written by Contributing Analyst Bruce Bahlmann:
Netflix and the Bigger Picture
There has been an onslaught of downgrades on Netflix stock, which might be triggered more by insider selling than industry insight. The big picture is that Netflix has been a quietly expanding performer since its inception.
In February, the company passed the 10-million-subscriber mark, overcoming giant competitors like Walmart and Blockbuster. Its three business lines include the media-through-the-mail rental; Internet on-demand rental service; and a not-yet-capitalized data provider service.
The through-the-mail movie rental business is Netflix’s bread and butter. Netflix is one of the top five providers of digital video in the United States, behind Dish, DirectTV, Comcast and Time Warner Cable. Netflix’s target audience is equipped with 131 million DVD players, residing in consumer homes. With more than 100,000 movie titles, the company offers the largest selection in the business.
The Achilles’ heel of this business is its return (disk) path, but Netflix’s strategically located mail distribution centers allow two-day turnaround from most locations in the country. This business line has also expanded to include the largest library of high definition (HD) titles, via Blu-ray disks, of any video provider – with more than 2,000 Blu-ray titles at the end of 2008.
The Internet on-demand video rental service has been widely criticized for its slow maturation. From its inception, the limited number of titles and service limitations – it was initially tied only to PCs – disappointed investors. However, the service has stabilized and expanded.
The service now offers over 12,000 titles and is accessible through Xbox consoles, Roku boxes, and a growing list of consumer electronics devices such as Blu-ray players and TV sets.
The service is free to Netflix subscribers, similar to cable’s VOD in that digital video subscribers subsidize the on-demand service. But Netflix could just as easily offer a streaming-only service, discounted over its through-the-mail rental service. Surprisingly, Netflix’s chief rival is neither cable nor telco, but rather its long-time nemesis Amazon.
The third business line is Netflix’s wild card – a potential data provider business. Like Macrovision and Tribune Media Services, Netflix could be selling value-added data to providers of video services, as the company is sitting on more than a billion movie recommendations from its subscribers who tend to be video connoisseurs.
Netflix also has a growing library of movie trailers, which together with those valuable recommendations could provide the basis of a strong video guidance data service. Several companies including Macrovision have approached Netflix about gaining access to these recommendations, rather than go out and try to gather a billion from scratch.
The significance of these assets is that they allow video service providers to promote their long-tail content. Rather than always watching the new releases, viewers could be made aware of equally good or better options that are residing in the video library.
In the future, look for Netflix to get increasingly involved in broadcast content and guidance technology, providing things similar to Time Warner’s Start Over, all within an interactive environment that is able to collect reviews on broadcast shows, which will ultimately become available on DVD or Blu-ray anyway.
As Wi-Fi and Ethernet become standard equipment on TV sets, the Netflix movie option also is likely to become increasingly accessible and visible.
– Bruce Bahlmann
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