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Netflix Podcast: Its Streaming Future and Why Pay TV and OTT Video Will Coexist

In our latest podcast we speak with Steve Swasey, Vice President of Corporate Communications with Netflix. Click here to listen and read on for my analysis and some of my offline chat with Steve.

Netflix is an interesting company because they have been at the center of some of the major changes in video entertainment over the years. Once seen as a niche postal delivery service for DVD renting fanatics, Netflix has become an industry leader shipping 2.2 million discs a day with a user base of more than 10 million subscribers. They have successfully fought off no less than two major new entrants which had the potential to sink them: Blockbuster, who launched their own postal delivery knock-off service to compete with the upstart, and WalMart, who after launch of a rival service finally packed it in and in 2005 handed their customers over to Netflix. Now Netflix is in a battle to be the leading movie streaming business on the Internet. And while they are competing with and Blockbuster’s own streaming service, as well as hot new OTT video properties like Hulu, their traditional physical media business must deal with unlikely competition from movie vending machine companies like Redbox.

What is uncanny is how deftly Netflix has managed despite titanic shifts in the video entertainment business. Remember the days when you had to go out to rent a movie? A five minute trip would turn into a 45 minute case study in indecision and group-think. And then all those terrible late fees. That was the pain point Netflix was addressing in their original DVD-by-mail business. With the DVD business supplemented by new Blu-ray titles, Netflix predicts its disc business to GROW for the next 5-10 years. Quite astonishing when you consider all the new online video options that have emerged and seem to keep popping up like dandelions in my front yard (alas, I fired the landscapers last year much to my chagrin).

And now Netflix is wisely moving its business with guns flaring into the streaming future. But it is not doing it alone. Netflix has friends. Its first kiss was with Roku via the $99 “Netflix Player by Roku” launched last year. Later came Blu-ray players from LG and Samsung and then its support for streaming on Mac, TiVo, and Xbox 360. As just one proof-point of its uptake through these devices, Netflix has already streamed 1.5 billion minutes of digital entertainment to over 1 million customers using Microsoft’s Xbox platform. And more recently Netflix announced deals with LG and Vizio to enable its service via Internet-connected HDTVs. Forget about driving in the car or even checking the mail box, now you don’t even need to get off the couch to enjoy Netflix’s library of over 12,000 streaming titles (to go with their 100,000 titles by mail). As Steve points out, the goal for Netflix is to be ubiquitous, so expect more announcements like this, including mobile devices.

“We want to be the movie channel,” says Steve. “However the Internet gets to you we want to be the place you go to get your movies.”

According to Steve, Netflix is in the middle of a three-act play. Act 1 was DVDs by mail. Act 2 is DVDs by mail and streaming. Act 3 is streaming only. So if streaming is the future, isn’t Netflix worried about a world where the customer has a bewildering array of online entertainment options? Not really.

According to Steve, consumers still need to pay for their entertainment somehow, and multiple business models will coexist:
1) The advertising supported model, growing out of the traditional free over the air network TV business and morphed online by players like Hulu and YouTube with services supported by pre-roll and commercial interruptions, will enjoy consumer uptake because it is free.
2) The subscription model, which allows you a range of content options for a monthly fee on an all you can eat basis, is the basis of Netflix’s current business model (both discs-by-mail and streaming) and also the predominant model for traditional Pay TV providers like cable and satellite.
3) The pay-per-view transactional model, led by online players like Apple, Amazon, and Vudu as well as Pay TV’s own VoD and PPV services, will continue to supplement TV watching whether it is landline, on air, or online.

“There is room for all three to grow,” says Steve. “Just like trucking, rail, and air transit all coexist in the transportation industry.”

The advantages Netflix has in the streaming world are many: a loyal and growing customer base, an expanding menagerie of gadgets that enable Netflix, a huge content library, a simple user interface, and what many hail as the best video recommendation engine (and it’s investing to make it even better).

Steve points out that Netflix is a “consumer-facing company so we do everything in a way that is simple and easy for consumers.” And maybe, ultimately, that is Netflix’s secret weapon. Business models will evolve, technology will change, but no one is second-guessing anymore the company that knows how to make a profit by giving customers what they want and how they want it.

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