VideoNuze Posts

5 Key Takeaways from Netflix's Q2 '10 Results

Netflix reported its Q2 '10 results late yesterday and once again the company turned in an impressive performance. Netflix added 1,034,000 subscribers, by far its best Q2 ever, to end the quarter at just over 15 million subs. Netflix CEO Reed Hastings said right up front in the management discussion that streaming is the key catalyst in the company's accelerating growth, with 61% of current subs now streaming at least 15 minutes in Q2, up from 55% in Q1 '10 and 48% in Q4 '09. After reviewing the company's Q2 results and listening to the earnings call, following are my 5 key takeaways:

1. Netflix really is becoming more about streaming with each passing quarter
It's hard to underestimate the pervasive role streaming now has on the company, in its value proposition, subscriber acquisition model, content acquisition approach, DVD and postage expenses, competitive situation, technology infrastructure and R&D agenda, partnerships, etc.

Though 61% of all subs are now using streaming, I would guess that practically all recently added subs are. The company is going through quite a transition. This quarter, CFO Barry McCarthy mentioned that early streaming adopter's behavior of reduced DVD usage has now reached Netflix's mainstream subscriber base. DVD shipments are still growing, but at a slower rate, due to streaming-for-disc substitution, which in turn improves margins (it costs Netflix around $.85-$.90 round-trip to deliver a disc and less than a nickel to deliver a full streaming movie). Anecdotally I continually hear about users now first surfing Netflix's streaming catalog before they surf the cable dial.

2. Exclusive content gains in importance, increasing competition for movies
I've long believed that Netflix's move into streaming would eventually compel it to license movies that would have traditionally gone to premium networks like HBO/Showtime/Epix.  Netflix's growing financial strength, brand loyalty and large sub base all position it as a potent new outlet for movies.

When I interviewed CEO Reed Hastings in May, he maintained that Netflix wants to be an outlet for premium cable networks rather than a competitor. Now however, Netflix is saying "At this point we can start to afford some major TV shows and movies on an exclusive basis, and plan going forward on a mix of more-expensive exclusive content and lower-cost non-exclusive content." That means Netflix is essentially going to compete for content with traditional premium TV networks. This will begin modestly, as with its recent Relativity Media deal for exclusive rights to a smallish set of its movies. And Netflix will still be a great outlet for premium networks' stellar original programming. But it will clearly be another voice at the negotiating table for electronic distribution of movies.

3. Going forward, TV is as important as movies
While Netflix is traditionally associated with movies, with streaming moving to center stage, Netflix now sees licensing TV shows as equally important. To the extent that its licenses are exclusive and/or pre-empt traditional distribution paths, this could be quite significant. Recent acquisitions of full seasons of shows such as 24, Nip/Tuck, The Family Guy and others, from networks/producers such as Fox, MTV and Warner Bros is an indication of Netflix's push into TV, with an emphasis on catalog, not current seasons. As Netflix grows its roster of TV programs I see at least 2 key implications: first, that Hulu Plus's value proposition gets pinched (more on that below), and second, that the traditional role of TV syndication for re-runs gets narrowed.

4. Competition from Hulu Plus and multichannel video programming distributors (MVPDs)
During Q2 Hulu Plus launched and there's been a lot of speculation about how competitive it is with Netflix streaming. Hastings acknowledged Hulu as a direct competitor and that "we're not going to underestimate them." Still, on the earnings call he also noted "they're too small to matter yet." I agree Hulu Plus should be on Netflix's radar, but with Netflix making an aggressive move into TV, Hulu Plus has steep challenges to compete and grow beyond its core broadcast network catalog. The issue comes down to resources. In this battle, Netflix is Goliath, able to write far bigger checks to Hollywood than can Hulu. The recent Nip/Tuck example is illustrative - a reasonably popular, tier 2 cable network show that Netflix won.

While Netflix acknowledges Hulu Plus, it's real competitive concern is how it fits into a landscape dominated by MVPDs (or pay-TV provider as I usually call them). Netflix believes it is a low cost supplement to pay-TV and not a replacement that causes cord-cutting. In the May interview Hastings called TV Everywhere efforts "frustratingly brilliant" and while their rollout has been underwhelming, if they start to ramp up that could put pressure on Netflix's growth. We'll see.  

5. Netflix availability on 100 million devices is huge competitive barrier
Netflix also said yesterday that by end of year it expects its streaming to be available on 100 million devices (e.g. Blu-ray, gaming consoles, connected TVs, iPads, Roku, etc.). In a world that still lacks application integration standards, Netflix has done the heavy lifting to get onto all of these devices that nobody else has (by contrast for example, Hulu Plus is only available on iPad/iPhone/iPod and Samsung connected devices). While others scramble to catch up, Netflix is already moving on to improve its streaming experience, for example, planning a new UI for PS3 among other things. Until connected devices embrace an open, standardized, browser-based model (which will begin with Google TV's launch later this year), Netflix has erected a huge competitive barrier. Once again, having deep pockets has real benefits.

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Categories: Aggregators

Topics: Hulu Plus, Netflix, Relativity Media

Qlipso is Now Integrated With Veoh

A few months ago the assets of Veoh, the well-funded, but ultimately unsuccessful online video aggregator, were sold to a tiny company named Qlipso, which is backed by Jerusalem Venture Partners. It was a highly unconventional deal and the rationale Qlipso provided at the time seemed vague to me. However, Qlipso has now done its initial integration with Veoh and after seeing it and talking with Qlipso CEO Jon Goldman last week, I have a better sense of what's going on and what's ahead.

When you visit Veoh.com now and select any video to watch, you'll see an invitation above the video window to "Share live with friends." Clicking that link invokes the Qlipso social platform, in which the video plays. When you sign in to Qlipso you're then able to create your own avatar or insert webcam video of yourself, either of which is displayed alongside others in the room. You're also able to communicate with others through text and audio chat.

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Categories: Aggregators, Deals & Financings, Games

Topics: Qlipso, Veoh

KickApps Extends App Studio to Support HTML5

Social software provider KickApps is announcing this morning that its App Studio will now support HTML5, in addition to Flash.

App Studio is a drag-and-drop authoring tool for creating customized video players. With App Studio, users can select from a range of pre-integrated plug-ins from KickApps' partners. KickApps CEO Alex Blum explained to me yesterday that users will now be able to author once in App Studio and have end-user devices playback in whichever video format they detect is appropriate (e.g. Flash when viewing online or HTML5 when viewing on an iPad or iPhone).

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Categories: Technology

Topics: Adobe, KickApps, OSMF

Best Hospitals Video Series Returns for a Second Year

Categories: Indie Video, Magazines

Topics: HealthiNation, U.S. News

Steve Jobs, The Media and All Of Us

Categories: Devices

Topics: Apple, iPhone

Marriott Gets It Right With "Ultra-Adaptable Room"

Categories: Miscellaneous

Topics: Marriott

VideoNuze Report Podcast #68 - July 16, 2010

Categories: Podcasts

Topics: Google, NATPE, Podcast

Why Netflix Has All of Nip/Tuck and Hulu Plus Doesn't

Last week I happened to be reviewing the catalog of Netflix Watch Instantly TV shows available and noticed something curious: all 6 seasons of Nip/Tuck were available. Not only was this the only TV series where all episodes were available, the finale episode had only been aired just a few months ago. That's unusual for Netflix, which typically only has sporadic, older seasons of TV shows available for streaming. I then checked out Hulu Plus and didn't find any Nip/Tuck full episodes available, just a smattering of clips. Considering Nip/Tuck was an FX show (a network owned by News Corp, which is a Hulu owner) and a perfect candidate to bolster Hulu Plus's mainly broadcast TV catalog, I wondered what was going?

This morning's WSJ answers my question: Netflix has signed a deal with Warner Bros. Home Entertainment Group to carry Nip/Tuck, as well as other lesser series such as "Veronica Mars," "Pushing Daisies" and "Terminator: The Sarah Connor Chronicles." (Warner Bros. produced the show) The deal illustrates the challenges Hulu Plus has ahead of it in trying to position itself as a comprehensive subscription service for more than just broadcast TV shows online.

The deal also underscores Netflix's relentless pursuit of additional content for its streaming catalog. Speculating a bit, I think it's also a dividend from the company's 28-day DVD delay deal with Warner Bros. from earlier this year. At the time I asserted that Netflix was trying to be a valuable partner to Warner Bros. by agreeing to give the studio a little breathing room to eke out some additional DVD sales before Netflix rentals kick in. First and foremost that deal made good business sense for Netflix, but I think it also showed studios that Netflix is trying to play nicely rather than trying to disrupt the ecosystem. Lo and behold a few months later the deal for Nip/Tuck and others occurs.
 
Netflix is being smart about building its streaming catalog. As the recent deal with Relativity Media also showed, Netflix is nibbling around the edges, getting access to better and better content, while continuing to demonstrate the value of its streaming feature to Hollywood. Next week Netflix will report its Q2 earnings, and no doubt it will show further big subscriber gains, adding to the almost 3 million subscribers it has added in the last 2 quarters. Though Netflix isn't directly competitive to Hulu Plus, the more deals Netflix can strike for shows like Nip/Tuck, the harder it will become for Hulu Plus to be much more than what it already is.

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Categories: Aggregators, Cable Networks