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 October 3, 2008

Since first extending its streaming video service to the TV in May 2008, Netflix has been busy building a very compelling offering. Quickly ramping up a direct-to-TV movie streaming service doesn’t just give Netflix a key competitive advantage over its direct competitor, Blockbuster; it also threatens to erode the value propositions of some of the largest TV operators in the country.

The Story So Far
When Netflix first announced its partnership with Roku in May, its streaming service had a library of some 10,000 movies.  In July 2008, it announced two more agreements to help reach the TV, one with Microsoft (Xbox 360) and another with LG (a network-capable Blu-ray player expected to be launched this weekend).  As well, there are a number of additional hardware agreements expected to be announced between now and the 2008 holiday shopping season. 

Despite this progress, the content available for streaming remained anemic, limited primarily to older titles. It seems, however, that the company has also been hard at work on that front. 

• On September 23, Netflix announced agreements with CBS and The Disney Channel to bring first-run series such as CSI, Numb3rs, and Hannah Montana to the streaming service (bringing its library to more than 12,000 titles).
  
• On October 1, Netflix added Starz to the list, allowing Netflix customers access to more than 2,500 titles found on Starz Play, Starz’ broadband video service (1,000 titles added immediately with another 1,500 to be added over the next few weeks).  This addition includes more recent movies such as Ratatouille and No Country for Old Men, movies available on the earlier pay-per-view release window (bringing its library to almost 15,000 titles).

With improved content and a growing list of hardware partners, Netflix is beginning to step to the front of the pack as “the” OTT video provider, at least for the moment.  For those that haven’t been paying attention to what’s going on in this space, here’s your wake-up call.  It’s about to get interesting.

Brick-and-Mortar vs. Pay-per-View
One of the challenges long haunting Netflix has been Blockbuster's expansive network of brick-and-mortar video stores. While no doubt an albatross of sorts for Blockbuster, few would argue that having a physical presence in local neighborhoods does make it more convenient for consumers to quickly find (and return) a movie, versus the two-day waiting period inherent to DVD-by-mail (one day there, one day back).  Since Netflix has no interest in brick-and-mortar operations (and for good reason), it was eager to find a way to reenergize its subscriber growth and extend its service reach beyond the 8.4 million subscribers it had in June (Q2 2008).

With the Netflix streaming service, the company now has an interesting tool by which to minimize (short-term) or even neutralize (long-term) Blockbuster’s brick-and-mortar advantage. With a Roku box or an Xbox 360, millions of viewers can now select from a growing array of classic and contemporary movies and TV programs, watching what they want when they want, all on their TV (not just the PC).  When combined with Netflix’s intention to build a far deeper catalog of movies for its streaming service than can be held by a brick-and-mortar store, the writing is on the wall for “the local video store” (as it has been for some time).  Of course, these stores will not disappear tomorrow; but the closer consumers get to a true click-and-view service, the less important the local video store becomes. It may be incremental, but the momentum is undeniable. 

Blockbuster Still Eating Dust
For Blockbuster, these times remain difficult.  It missed the boat on VoD and lost significant market share to an upstart with a better idea (Netflix and DVD-by-mail). Now the same company beats Blockbuster to the TV with subscription-based streaming video services.  Yes, Blockbuster did recently snap up Movielink, but it has yet to do anything meaningful with the acquisition on the PC, much less attempt a jump to the TV. As such, it seems that the scalability and immediacy of a streamed service continues to elude the company.

We recall a conversation with Blockbuster some five years ago at IBC regarding the use of broadband connections for home movie delivery. At the time, there was much talk of the Company bringing such a service to market in a matter of “months.”  It never happened.  How has Blockbuster done since that time? It has shuttered hundreds of local stores, (embarrassingly) launched its own Netflix-like DVD mail-order service, and has been in serious discussions about buying a failing CE chain (CircuitCity).  Not exactly what they had in mind in 2003.  However, the game is not over yet.  The question remains, can Blockbuster launch a more robust streaming service in time to head off Netflix, as opposed to just a me-too offering as it did with mail-order DVD?  Should this happen, its physical stores become a powerful distribution channel for the enabling hardware and marketing the service to consumers.  Then again, this would require Blockbuster to think beyond its historical limits, a difficulty that continues to haunt the Company even under new leadership.

Postscript
The threat posed by Netflix’s streaming service doesn’t stop at Blockbuster. Keep your eye open for the next TDG Opinion which focuses on the threat Netflix poses to traditional TV operators.