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Netflix Sets its Sights on Content, Competition and Customization


Remember the self-inflicted bruising Netflix received in late 2011 with the Qwikster disaster? Well rest ashore; skeptics aren’t letting CEO Reed Hastings forget either.

Besides the company’s miscue (and a few others since its 2007 video-streaming inception) Netflix accrued a 4.96% quarter-over-quarter increase in earnings (from 3Q 2011- 2Q 2014) since my last posting of Netflix back in 2011. In April of that same year – before the reversal decision to split its online streaming and DVD-rental plans into two companies – Netflix announced that it had 23.6 million subscribers in the United States and over 26 million worldwide and by year’s end, total revenues (domestic and international) for the company reached $3.2 billion. But due to price hikes, customers left and as a result in 2012 Netflix reported an 88% drop in third-quarter profits.

And like the finale of a favored Hollywood movie, many thought this was the end of a beautiful beginning.

The following year, as luck, fate, chance (or whichever you call it) would have, the publics’ viewing habits began to change. Salon Magazine states that “In 2012, for the first time ever, Americans watched more movies legally delivered via the Internet than on physical formats like Blu-Ray discs or DVDs.” This information is revealing because not only are we suckers for convenience, but as the shift began away from the home DVD library as no longer tying into the décor and seen more as an eyesore, but also, the way in which we logged onto the Internet shifted. A 2012 study conducted by Accenture, a management consulting group, showed that Internet access through mobile devices, such as smartphones, rapidly became the primary source “across age groups, and across mature and emerging markets.”

With Hastings’s finger still on the cusp of disruption, in February 2013 Netflix released “House of Cards,” its first original content program for its video streaming service; which subsequently won three Emmy awards – a first for a non-traditional television show.

Touted as the world’s leading Internet television network with more than 50 million members in over 40 countries, Netflix, Inc. (Nasdaq: NFLX) operates on three segments: Domestic streaming, International streaming and Domestic DVD; deriving its revenues of monthly membership fees from both online streaming content and DVD-by-mail.

In the hay-day of when television was king, ABC, NBC, and CBS reigned supreme. Then entered cable networks; such as HBO, Showtime and Cinemax offering premium (commercial-free) channels to viewers. Today, the likes of Netflix, Amazon (Amazon Prime), Hulu (Hulu Plus) and others provide online video streaming content via broadband.

Blockbuster, a former brick-and-mortar rival – which Hastings offered up a forty-nine percent stake of Netflix back in 2000, but to his chagrin, Blockbuster declined – shut down its U.S. operations in January 2014. Another competitor, in particular, is Redbox. Founded in 2002 – originally as a convenience-store kiosk featuring grocery items – the DVD-provider, seemingly, popped up everywhere by 2008. To date, more than 3 billion discs have been rented with some 39,500 locations nationwide. In 2009, Outerwall Inc. (Nasdaq: OUTR), Coinstar’s parent company, acquired full ownership of Redbox. With further pursuits of capturing some of Netflix’s market share, Redbox partnered with Verizon to launch Redbox Instant, a video streaming service in 2012. Although, rumor has it, that there will soon be an end of the online service. [Side Note: Mitch Lowe, a former Netflix executive, was Redbox’s president from April 2009 – November 2011.]

As others either fell by the wayside or took the baby-steps approach, Netflix dove in head first in its quest to be a part of the television-viewing evolution. Expansion included “making itself available on game consoles, mobile phones, tablets, and other streaming devices, such as Apple TV and Roku.” (The New Yorker, 2014)  In 2010 stretching beyond its US boarders Netflix entered the Canadian market; the Caribbean and Latin America were later added one year later. By January 2012, Netflix was ready to set its sights on Europe with a launch in the UK and Ireland and with the Netherlands soon to follow in 2013. On September 15, 2014, the now not-so-in-your-face-with-the-burnished-color-red company made its introduction into French society.

Prior to Netflix’s international growth, the need for a faster and more efficient content delivery network emerged. Thusly, Netflix sought alternative means to have their terminating access networks better managed (as Netflix initially provided its own CDN) and to gain further access into their customer’s cable operating networks (such as Comcast). However by 2009, Comcast began to tack on additional charges to Netflix’s CDN providers citing “for additional capacity into [their] network”. A Netflix-Comcast battle soon ensued. [For a more detailed reading on the rift, click here.] Albeit not a devastating one, but this conflict is an example of Netflix’s impending woes: as online subscriptions increase, so does the company’s growing dependency with Internet service providers; which begs a continual query for Netflix executives: pay for it now and suffer later, or, suffer now and pay for it later?

Be that as it may, in a February 2014 interview with The New Yorker (previously cited), Hastings gave a pretty audacious projection predicting “that by 2016 half of all television will be delivered by the Internet” and that Netflix could potentially reach a U.S. market of “sixty to ninety million” subscribers. But in order to pull this off it will have to “hold its own against HBO” (one of its principal competitors as stated by Netflix) as well as those that are able to provide video-on-demand (VOD).

For Netflix, HBO is a lofty challenger because they have what Netflix doesn’t, an extensive list of original programming along with approximately 127 million subscribers worldwide as well as HBO GO available in 22 countries compared to 56 million subscribers worldwide currently for Netflix. From The New Yorker article, the author goes on to explain Netflix’s uphill HBO challenge:

Netflix will have to invest further in original content. It spends only about two hundred and fifty million dollars on originals, some eight per cent of its three-billion-dollar programming budget. HBO spends four times as much. [At the time of this article written February 3, 2014] And unlike HBO, which owns the sixty-eight series it has produced, Netflix owns only the first-window streaming rights of its programs, including “House of Cards.” [Chief Creative Officer Ted] Sarandos boasts that eighty per cent of Netflix’s current spending is on “exclusive” content, but this simply means that Netflix licenses these programs exclusively for a limited period, after which they may be sold elsewhere. Netflix is still largely dependent on the film and television studios, which can raise their licensing fees as they wish.

Netflix recently signed a five-year deal with DreamWorks Animation to produce three hundred hours of original animated kids’ shows; making DreamWorks Netflix’s single largest supplier of original kids’ content, according to DreamWorks Animation CEO Jeffrey Katzenberg. “The effort is part of a long-term strategy to train viewers to watch Netflix. ‘It’s habit-forming,’” said Sarandos.

It was announced this week that the Japanese telecom giant Softbank (the same company that lost the bid to merge T-Mobile and Sprint) plans to acquire DreamWorks Animation. No word yet on how this would affect the deal with the studio. Attempts were made to reach out to Netflix but comments were not received at the time of writing this piece.

Not to be outshined, Netflix made its own announcements. A never-before deal in Hollywood history with a video distribution service (not your usual straight-to-video contract) to premiere the major motion-film, “Crouching Tiger, Hidden Dragon: The Green Legend.” With a release date of August 28, 2015, the “Crouching Tiger” sequel will debut in simulcast with Netflix and IMAX theaters. And reported Thursday, comedian Adam Sandler is contracted to do a four-movie deal for the online video service. Netflix’s CCO Sarandos is determined more than ever to narrow the gap between the movie release date to the content-licensing timeframe.  So movie theater owners are sure to resist.

Netflix also struck another exclusive film distribution deal back in 2012 (reportedly at a hefty price tag of $1 billion) with Disney. It was reported that Netflix will become the only U.S. subscription TV service to offer films from Pixar, Marvel, Walt Disney Animation and Disneynature – set to begin in 2016.

For 2013, Netflix made over $171 million in annual profits with nearly $4.4 billion in revenues compared to HBO’s $1.7 billion in annual profits, generating $4.89 billion in revenues and winning “more Primetime Emmy Awards in 2013 than any network for the 12th consecutive-year” for parent company Time Warner, Inc (NYSE: TWX).

As of October 2, 2014, Netflix’s stock price has gone up 5,212.63% since going public in 2002 . In September of 2013, Netflix’s stock price reached $313.06 surpassing its first-time high of $295.14 (July, 2011). By September 2014, a share of Netflix stock gained an all-time of $484.39. Despite its performance, the notorious Netflix skeptic Wedbush Securities analyst Michael Pachter, accuses investors as to having “irrationally bid up Netflix beyond fair value.”

In spite of Time Warner Cable’s CEO Jeff Bewkes’s 2010 infamous quote in which he equates Netflix to the Albanian army as “no threat,” he and others alike are definitely reading from their playbook. Several large telecom corporations are joining forces with cable and satellite TV companies. Needless to say, Netflix is not taking this lying down.

A pending merger with the DISH Network and Verizon is expected to shake up the traditional pay-TV business by targeting millennials “most likely to ‘cut the cord’ and disconnect traditional pay TV in favor of free or lower-cost content they can get via the Internet on multiple devices.”

As for AT&T’s proposed $48.5 billion acquisition of DIRECTV, consumer advocacy groups argue that it “will reduce competition for TV subscribers, increase AT&T’s ‘incentive to discriminate against online video services,’ and give AT&T more reasons to neglect its aging copper network”. While the Comcast and Time Warner Cable deal is said to give the company too much power over the nation’s cable and broadband markets.

In the short-term, Netflix’s pay for licensing content may be costly but in the grand scheme of things “Sarandos’s wager seems to have been validated by the significant subscriber gains Netflix garnered in the first nine months of 2013” when nearly 4 million new members joined, a 15% increase, when it debuted four new shows: “House of Cards,” “Hemlock Grove,”  “Orange is the New Black,” winner of three Emmys, and “Turbo FAST”. (Fast Company, 2014)  With FCC petitions, broadband width battles, accumulating and solidifying original content, Netflix is finding itself in a brawl for supremacy.

As long as Netflix remain at the forefront of effectively honing in on customers habits and expectations as opposed to purveyors of forcing change (as Hastings has learned) or taking advantage of customers lack of options, Netflix could be well on its way to gaining the desired 61 percent increase in US subscribers.

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