• Netflix-LG Set-top Box is Another Misstep

    Yesterday's announcement by Netflix and LG Electronics that they are partnering to develop a new set-top box generated a lot of coverage. For me the deal shows at least 2 things. First, there is an endless reservoir of optimism concerning consumers' willingness to adopt standalone devices for broadband-delivered video. And second, that Netflix, which has been all over the board in the last couple years in trying to define a broadband delivery strategy, has seemingly made yet another misstep in this critical area.

    Regarding the optimism about standalone devices, as many of you know, I recently wrote about this in a post entitled "Broadband Video on TVs is a Mirage" in which I concluded that these broadband appliances are unlikely to gain widespread market appeal. Though little information was revealed about the Netflix-LG box, for now, I don't see any reason to believe that this new box will be an exception to the logic I laid out in that post. At best I view standalone broadband appliances (e.g. AppleTV, Vudu, Moviebeam, Akimbo, etc.) as appealing to only a small sliver of consumers.

    My logic applies to Netflix-LG as follows: how many people are realistically going to shell out $400 (assumed price) for a new box, plus spend the time involved to install it, when the principal benefit is to be able to watch a small subset (6K out of Netflix's current 90K catalog) of content Netflix already makes easily available on the robust DVD format? I'd say maybe 10% of Netflix's current base of 7 million, max. That would be 700K boxes TOTAL - hardly the kind of numbers that make a CE executive's eyes pop.

    A greater issue is that this new box seems to represent just the latest in a pattern of dubious moves by Netflix, coupled with poor communications, regarding how it intends to gracefully migrate from its current DVDs-through-the-mail approach to succeed in the broadband era.

    For the last two years Netflix has publicly appeared to jump from one broadband approach to the next. For example, yesterday's box announcement was accompanied by news that Anthony Wood, whom Netflix brought on board just 8 months ago as its V.P. of Internet TV, would be departing from the company, reversing Netflix's previous plan of developing its own box (which itself was an ill-considered idea).

    The LG box approach continues Netflix's pattern of cloudy planning and communications. On a day that should have been all about articulating why this new co-developed LG box is, at last, the correct approach, Reed Hastings, Netflix's CEO seemed to veer completely off message in his remarks to the NY Times, stating that "We want to be integrated on every Internet-connected device, game system, high-definition DVD player and dedicated Internet set-top box. Eventually, as TVs have wireless connectivity built into them, we'll integrate right into the television."

    Huh? If this "Netflix-everywhere" approach is instead the real strategy, then why put out the LG press release at all, much less specifically say in the first sentence that Netflix is "joining forces to develop a set-top box." If the company is really interested in an "everywhere" approach, then it should have announced a group of partnerships to validate Mr. Hastings's aspiration and stayed away from the notion that it would co-develop any particular model. A Netflix investor is left wondering, yet again, what is Netflix's real game plan, how it will allocate its finite resources and how it will leverage its brand equity to succeed in the broadband world?

    My sense is that Netflix seems to have a bias that it needs to be intimately involved in hardware development, rather than partnering widely and relying on the market to sort things out. Netflix should follow TiVo's recent (and correct, I believe) approach in trying to "piggyback" on top of devices as they're deployed and gain market traction. Starz is yet another example of a content provider staying agnostic, correctly forming partnerships with various device manufacturers for its Vongo service, while steering clear of embracing any particular approach. While Mr. Hastings hints that Netflix wants to do exactly this in his remarks, the LG announcement undermines this strategy, if it can even be called that.

    Netflix has assiduously built one of the best brands in subscription entertainment. Its task now is to leverage that brand in the broadband era. Regrettably, yesterday's LG announcement provides little evidence that the company has finally formed a winning plan. With competitors all around it, Netflix needs to get this right sooner rather than later.

    Agree or disagree with my assessment? Post a comment and let everyone know!