A few weeks ago, I relegated my 6-year-old Sony DVD player to exclusive CD playback duties and replaced it with a new, network-enabled Samsung Blu-Ray DVD player, which includes access to Netflix’s (s NFLX) streaming service for that company’s subscribers. So I signed in and before you know it, I had wasted my entire weekend catching up on movies I had always planned to see, but had been too lazy to order as DVDs. With higher-speed Internet connections of over 20 Mbps, more network-enabled devices such as televisions and the availability of an increasingly larger online content library would essentially put DVDs and other physical media on the road to nowhere. And that’s a good thing, not just for Netflix but also for the movie industry.
More importantly, such speeds are going to turn Netflix into a core entertainment company of the 21st century. (I will be chatting with Reed Hastings, CEO of Netflix, at our upcoming NewTeeVee Live conference on Nov. 12th. You won’t want to miss it; get your tickets today!)
Thanks to a 50 Mbps connection, I watch movies without any stutter or loss of quality. Sometimes I even forget that I’m not watching a DVD. Apparently I’m not the only one who feels that way. Yesterday, Netflix reported its third-quarter 2009 results and offered up some statistics that showed the number of people watching video-on-demand via Netflix is on the rise.
In the third quarter of 2008, some 22 percent of Netflix subscribers streamed a TV episode or movie, for at least 15 minutes, the company said. A year later, that number had risen to nearly 42 percent. “When you consider there our sub base is 28 percent larger than a year ago, this means that the raw count of subscribers engaged in streaming has more than doubled over the last year,” Hastings told a group of Wall Street analysts. Netflix is also partnering with an undisclosed gaming device maker with a substantial installed base to grow its streaming service even more.
These are other signs of behavior changes among consumers, changes that will take hold over the next three years. Earlier this week, Cisco released a study which showed that prime time on the Internet was from 9 pm to 1 am. The same study also pointed out that we were all collectively watching more and more video. This is both good and bad news for the cable industry and the movie studios.
For cable broadband providers, streaming video, as Hastings rightfully pointed out, is “the killer app driving adoption of high-end broadband packages.” More importantly it is good business — since it has no content costs, it has huge gross margins and it allows them to use their transmission spectrum more efficiently than sending out video channels. Fiber broadband providers should be viewing it as a way to goose demand for their high-end packages.
Cable’s video business divisions are not so fond of companies such as Netflix, mostly because they largely alleviate the need for consumers to order premium and on-demand content. Those poor cable guys — in addition to the pressure streaming is going to continue to put on them, they’re facing competition from low-cost DVD rental outfits such as Redbox.
Redbox rents DVDs via kiosks in high-traffic retail locations such as Wal-Mart and Albertsons for about $1 a day. The cable companies’ video-on-demand offerings, by comparison, costs $5 for a movie that’s only available for a 24-hour window. Furthermore, some chains are offering free rentals to customers that spend a certain amount of money. (Related GigaOM Pro Analysis, sub required: Redbox Success Means Netflix Should Consider Kiosks.)
Taken together, these things should be good for the content industry, but instead the movie studios are still looking for ways to squeeze every last bit out of the DVD. According to Hastings, the studios are working on a new “short sales-only window that would be a benefit to DVD sales and therefore to the health of the DVD ecosystem.” Hastings also noted on the call that he’s less dependent on getting the latest DVDs as quickly as possible in order to grow his business than, say, some of his competitors such as Blockbuster and RedBox.
Nevertheless, for the movie studios the writing is on the wall; they have very little time to diddle about. Just look at this growing list of devices that support streaming videos.The more they support streaming, the more they make it possible for people like me to consume movies more often than say buying a DVD or even renting one from RedBox.
Meanwhile, I’m looking forward to the weekend and watching the Season 5 of “The Wire” thanks to Netflix.