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Friday, October 31, 2014

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  • Netflix Should be Aggressively Pursuing Broadcast Networks for Watch Instantly Service

    Over the past several months Netflix has made a series of announcements related to its "Watch Instantly" feature. On the device side, there are new partnerships with TiVo (for Series 3, HD and HD XL models), Microsoft Silverlight (for Mac viewing), Samsung (for Blu-ray players), LG (for Blu-ray players), Xbox 360 and of course Roku. All allow Netflix Watch Instantly content to be delivered directly to users' TVs. Meanwhile on the content side, there have been deals with Starz, CBS and Disney Channel, with more no doubt yet to come.

    Our household has been an enthusiastic subscriber to Netflix for years and I welcome the commitment that Netflix appears to be making to Watch Instantly. However, as I pointed out in May, in "Online Movie Delivery Advances, Big Hurdles Still Loom," Watch Instantly is hobbled by its limited catalog, now totaling around 12,000 titles, just 10% of Netflix's total catalog, even after including the recently added Starz titles.

    The fundamental problem Netflix is bumping up against in building out Watch Instantly's film catalog is Hollywood's well-established windowing process. Studios have wisely and methodically maximized their films' lifetime financial value by doling out the rights to air them to a series of distribution outlets. These rights unfold in a carefully calibrated timeline and have become wrapped up in a thick layer of contractual agreements extending to all parties in the value chain. It is a system that has served all constituencies well, generating billions of dollars of value. It is also unlikely to change in any material way any time soon.

    As such, Netflix, the "world's largest online movie rental service," as it calls itself, is increasingly discordant. On the one hand, growing the Watch Instantly service is crucial to Netflix's long term success in the digital/broadband era but on the other, it doesn't have the ability to offer a competitive catalog that meets consumers' online delivery expectations. So what to do?

    My recommendation is for Netflix to incorporate the delivery of TV programming, via Watch Instantly, into its core value proposition. Specifically, Netflix should be making an all-out effort (if it is not already doing so) to secure next-day rights to deliver all prime-time broadcast network programs to its subscribers.

    This strategy provides Netflix with many clear benefits and positions it well for long-term success. First, in these tight economic times, it dramatically expands the value of the Watch Instantly feature, turning it into both a bona fide subscriber retention tool to battle churn as well as a high-profile subscriber acquisition lever (not to mention an exciting pull-through offer big box retailers could use in their Sunday circulars to generate traffic).

    Second, it is a clever competitive strike against four primary alternative ways whereby consumers can watch network programs on demand: cable-based VOD, a la carte paid downloads at iTunes/Amazon/others, free online aggregators like Hulu/Fancast/others and DVRs (though note the TiVo deal addresses this last option).

    A comprehensive Netflix prime-time catalog compares well with each alternative. Against cable VOD it offers familiar, superior navigation plus a viable revenue stream for broadcasters while cable tries to get Canoe ready; against paid downloads, the obvious advantage of being a value-add service; against online aggregators, commercial free delivery; and against DVRs, the lack of consumer hardware purchases and persistent recording space limitations.

    All of this should make Netflix a very appealing partner for the broadcast networks. They are getting hammered by ad-skipping, audience fragmentation, quality programming migrating to cable and an inferior single revenue source business model. The prospect of Netflix offering payments for their programs should be well-received. There may be concerns about programs' long term syndication value and also the potential enablement of a new gatekeeper. In better times these might be deal-killers; in this climate they shouldn't be.

    Finally, there's the big potential long-term Netflix prize: if it can stitch together a large-scale network of compatible devices for Watch Instantly distribution, it could create a viable "over-the-top" alternative to today's multichannel subscription services (cable/telco/satellite). As I described in my recent "Cord Cutters" post, to really succeed, Netflix would have to eventually incorporate cable network programming. But if its reach is wide and its economics sound, that's within the realm of possibility as well.

    But those are long-term issues. For now, while the recent CBS deal is a great start, Netflix should be working double-time to build out a full library of broadcast programs. It would dramatically improve Watch Instantly's appeal and value, while positioning Netflix well for the broadband era.

    What do you think? Post a comment now.

     
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