As someone on the front lines of the digital content industry I often hear entrepreneurs, venture capitalists and many tech bloggers speak about the Netflix Streaming service becoming the de facto digital movie experience ultimately cannibalizing Video On-Demand (VOD) or Electronic Sell-Through (EST). While I am a huge fan of the Netflix “experience” that includes streaming to most internet connected devices, I do not believe Netflix Streaming is the “Holy Grail” for digital movies. What I do believe is that Netflix Streaming is NOT a competitor for VOD or EST, but rather is an alternative for Pay TV services such as HBO, EPIX and Showtime.
Digging deeper into the marketplace, one recognizes that the content available on Netflix Streaming is at best equivalent to Pay TV. For further clarification, 80% of DVDs, VOD or EST purchases occur in the first 120 days after the release to DVD – well before the Pay TV window or availability on Netflix Streaming. (Note: New Release DVDs are available for rent on Netflix 28-days after release).
But even more revealing, the available content on Netflix Streaming may become increasingly more difficult to expand. Back in 2008, Netflix signed an agreement with Starz to gain backdoor access to Disney and Sony Pictures’ movies during the Pay TV window. However, the deal expires in 2011 and Disney has recently made a concerted effort to renegotiate its Starz deal to circumvent Netflix’s ability to renew its Starz license. With this being said, it appears difficult at best for Netflix to maintain the Starz relationship and its considerable portion of the content available for streaming. Conversely, if Netflix is successful in renewing its license with Starz my estimates would place the licensing cost at upwards of $300 million a per year or about $20 per user, which could drive up the monthly subscription price.
Many believe that the uncertainty surrounding its license with Starz was a driving force behind its deal with Epix. While much has been made by the media of the deal with Epix to provide Netflix the ability to stream movies from Lionsgate, Paramount (excluding DreamWorks) and MGM, the movies won’t be available until 90 days after the Pay TV window or approximately 1 year after the initial DVD release. While this is still a big win for Netflix, it has little negative effect on the VOD or EST marketplace. However, on the other hand, Netflix has a major impact on consumer behavior – by shifting more consumers away from physical discs – digital then becomes the primary method for consumers to watch movies. Unlike the music industry, where the most devoted music consumers can opt to subscribe to Spotify or Rhapsody to gain access to ALL music they want to consume, the movie industry is vastly different and is unable to support an all you can eatmodel for its premium content. Currently, consumers who want to digitally “rent” or to “own” a new release or recently released movie must choose an alternative to Netflix Streaming – which currently is only a la carteservices.
As Netflix has demonstrated, the Connected TV and Set-Top Box marketplace has transformed the digital entertainment landscape. I believe the result of this transformation will be demonstrated in the next few years with consumers gaining more choices in how they watch movies and will ultimately shift the power from cable and TV service providers into the hands of innovative services providing consumers with anytime, anywhere access to their favorite movies. The future for digital entertainment is bright – and I predict dramatic innovations for 2011.