Netflix gambles online
Facebook acquisition makes big splash
Netflix is shifting its focus from mail-order DVDs to streaming video. While the company has not abandoned its mail service, it has introduced streaming apps for the iPad, iPhone and iPod Touch. Netflix, also viewable on PCs and TVs using various gaming systems, has beefed up its streaming catalog by reaching several deals with film studios and production companies, including a $1 billion agreement in August to carry movies from Paramount Pictures, Lionsgate Entertainment and MGM.
What They're Saying
Netflix is seeking to move away from the mail-order DVD business, which is bloated with shipping and warehouse costs, and build its digital, “Watch Instantly” business. But this deal [with Paramount, Lionsgate and MGM] comes at a cost for the high-flying company (whose shares have doubled in the past year). In order to pay for the deal, Stifel Nicolaus estimates Netflix must attract 500,000 new subscribers a quarter more than the firm's current estimated subscription growth.
Netflix is right about the direction video is taking. A lot of big firms, and even studios it wants to partner with on content, are going to move aggressively into streaming. That is why Netflix is wise to begin diverting the majority of its resources to streaming right now, even if its mail business is still profitable.
As for Netflix, [the Paramount, Lionsgate and MGM agreement is] a critical – if exorbitantly expensive – step in the company's ongoing efforts to not only move away from its increasingly outdated (and similarly pricey) mail-order DVD business, but also remain competitive with the cable companies. By the same token, the streaming video service further threatens the model on which premium cable is built. No doubt, this is cause for worry at outlets like Showtime.
Netflix is smart to realize that the future is streaming, and they're quickly becoming the de-facto service for these catalog titles thanks largely to the deals they've struck to get their service on devices such as the Xbox 360 and the iPad. Soon they'll be bringing the streaming service to the iPhone as well… Netflix also remains the gold standard when it comes to customer service. Whenever the streaming service experiences even a small hiccup, I get an e-mail asking if I'd like a partial refund of the month.
Netflix would be foolish not to aggressively pursue streaming video. As new technology develops, consumers will expect to immediately watch the movie or TV show of their choice. In this case, the US Postal Service's loss is consumers' gain. As Netflix improves its direct-to-consumer products by moving away from the mail, it can also keep rising postal rates from cutting into its profit margins. However, Netflix's streaming library pales in comparison to its DVD selection, so look for the company to continue investing in its online subscription options.