Netflix Breaking Through the PayTV Window
Colin Dixon, Senior Partner, Advisory
July 7, 2010
Further evidence that Netflix is shaking off the shackles of a DVD rental business emerged Tuesday. Relativity Media, producers of such titles as “Get Him to the Greek” and “Robin Hood”, will allow Netflix to stream first-run theatrical films at the same time as HBO and Showtime. This agreement is good for Netflix as it reduces the expense of shipping a physical DVD to subscriber homes. But it’s also good for subscribers as they no longer must wait 2 days or more to receive the DVD. They can stream it immediately to the host of devices that run the Netflix client.
But while Reed Hastings crusades to reduce postal expenses, something else is happening. He is changing the very nature of Netflix’s business.
In January of this year I was quoted in the San Francisco Chronicle as follows:
"Netflix is the poster boy for streaming at the moment. Their competition isn't Blockbuster anymore, their competition is HBO."
As long ago as May of 2009 TDG identified premium PayTV as Netflix’ true competition. The announcement with Relativity Media certainly seems to move the company further down this path. For the first time Netflix subscribers will be able to stream recent movies rather than wait for the DVD to arrive. But are subscribers really interested in streaming the movies from Netflix? Two data points suggest strongly that they are.
Our 2010 report “Profiling Netflix Streamers – A Consumer Snapshot” shows that Netflix subscribers are embracing the streaming service. 64% of Netflix subscribers that have broadband use the streaming functionality with half of those watching the content on their TV.
The second data point is less scientific, but reveals an interesting dynamic that should make PayTV operators sit up and take notice. I’ve been speaking at conferences a lot lately and have taken the opportunity to do a couple of audience polls. I asked a meeting of a hundred or so CTAM members (Cable and Telecommunications Association for Marketing) and the 300-strong audience at OTTcon East the following 4 questions:
Two things were pretty shocking: to my eyes there wasn’t a lot of difference between the number of people with Ondemand and Netflix. However, far more of the Netflix subscribers were streaming (70-75%) than cable customers were watching OnDemand (40-50%.) I know the audience in both cases was comprised of industry insiders but even CTAM members were choosing to watch Netflix over OnDemand!
And this brings us to the real issue for PayTV providers. Netflix is now competing directly for consumer attention at the television set. Today, they are doing this predominantly with library content. If a subscriber wants to watch a newer movie they have to return to their PayTV service and tune to the HBO broadcast or on-demand channel. With the Relativity Media deal and, we assume, others to follow, the subscriber won’t need to return to PayTV for newer content. Over time, the value to the subscriber of premium PayTV services such as Showtime and HBO will be eroded as viewers spend less time using them and more time with Netflix.
Our research indicates that nearly 20% of broadband subscribers are already thinking about downgrading their service. Can PayTV operators and networks afford to allow Netflix to further erode their value?
If you want to know more about Netflix and content distribution in the Internet age, sign up for the TDG and Videonuze webinar, Demystifying Open vs. Closed Internet Video Distribution Platforms, tomorrow, July 8. This session is complimentary for industry professionals.
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