Scoble: Netflix is Dead

I consider Robert Scoble a good friend, but he is way off when he writes Netflix is Dead. He probably didn't know that Netflix is expected to unveil a digital download strategy this month, so I think he should wait to hear what they have planned before he writes them off. Hastings and his crew faced Wal-Mart and won (how many companies can say that?), and they have about 3 times the number of online subscribers as Blockbuster. If Netflix acquires 15 - 20 million customers before downloads take off, they can probably survive the transition.

The problem with the existing download services is the lack of content. The existing download services have at most 2,000 movies, and Netflix stocks 70,000 titles. Apple, the hot topic of conversation this week, has only 250 movies for sale (source: Apple presentation at Macworld). Most services sell the movies at the same price at retail, or rent them for only 24 hours after you start playing them. The studios also encrypt them so they aren't as portable or as convenient as a DVD.

I know downloads are the future, but it will be a long time before Verisign kills Netflix (I think they should worry more about Blockbuster and Microsoft).

What do you think? What would kill Netflix?

Thanks to Gowan, Adnan, and Lamarr for sending this in.

Comments

[Matthew R. Miller]

I would be interested to know what you think about the changes Blockbuster made to their online service. It actually had me change over to Blockbuster from Netflix earlier this month for.

Cheers!

[f0am]

As far as the Blockbuster vs. Netflix go's, I personally signed up to try out the blockbuster service and within the first day am not impressed at all. I have taken screen shots of my first 24 hours.

But to stay on topic, downloaded movies..
Lets see here I have probably 10k invested in my home theater. Why would I degrade my home theater by watching a movie on my 21 inch computer moniter wearing headphones.
Or for those with home media centers the video quality and sound quality of your media center cant compete with high end audio components. So I guess those who really dont care about the quality of their sound or video will switch to this sort of thing. But I for one think the idea is horrible.

f0am

[Agent Snotface]

[Note: this code is for 2 weeks and this person has been banned for spamming the site. - Mike]

Get 3 months free with Blockbuster Online's Total Access Program. Use Promotional code '-------' at signup. Promotional code ----- gets you 3-movies out at a time, 1 monthly e-coupon for use in-store for a free movie (New Release or Non-NR) or game rental, plus unlimited instore-exchanges for all online-rentals. All free for three months. No contract required- can cancel anytime before or after 3-month trial. Promotional code expires: 7/15/07.

[Lamarr Wilson]

Mike,

This article irritated me when I read it, which is why I sent it to you. There is no way a company like Verisign could "kill" Netflix anytime soon.

I think services like IPTV will give them a run for their money, especially if it's successful, but it will be a LONG time before we no longer use discs. And to be honest, I think that IPTV is more of a threat to Tivo than any other company, and that worries me, because I invested in an HD Tivo which was expensive. It'll be interesting how all of this plays out in 2007.

As I stated before, I have a 20Mbps Download/2Mbps Upload connection; I want to use it for more than just gaming and occasionally downloading music!

[eazyguy52]

May I direct your attention to this article I had read earlier this week:

http://www.hollywoodreporter.com/hr/content_display/home_entertainment/news/e3i8aed0effbc9403093f9804aa0a5efb1e

LAS VEGAS -- As expected, an exceptionally strong fourth quarter propelled consumer spending on DVD sales and rentals in 2006 to record heights, while the VHS death-march drag kept overall home entertainment spending flat with last year.

Combined DVD and VHS purchase and rental spending came in at $24.2 billion, just below the $24.3 billion consumers spent in 2005, according to numbers compiled by DEG: The Digital Entertainment Group and released Monday during the Consumer Electronics Show.

DVD sellthrough spending rose to $16.6 billion from $16.3 billion in 2005, while DVD rental spending grew to $7.5 billion from $6.5 billion. Both are record highs.

Doesn't sound like DVD is in its last throes to me. And where have I heard that expression?

[gir]

The only way on-line DVD rental will die is if something more convenient comes along, with equal or greater value (and even then, that doesn't necessarily mean the demise of NetFlix).

Video download has the potential to be both more convenient and a better value, but current offerings are pathetic and I can't even guess when that will change. Apple and XBox are closest IMO (because their devices are connected to your TV), but they need to lower prices and provide all the extras when they sell you a movie.

Regardless, nothing will really gain a foothold till truly high speed connections are more common. My 768 DSL ain't gonna cut it.

[Ricklogic]

NETFLIX IS DEAD

Download rights have to be bought for a lot of money. Buying DVD's does not let you do download, VOD, IPTV, in-store kiosk download and burn, or anything else that you have not negotiated and paid for.

Catch these headlines?
Mercury News
Insiders: Netflix chief stepped up sales in '06
EXECS CASH IN AS COMPANY'S SHARES MEANDER
Posted on Mon, Jan. 08, 2007

http://www.variety.com/index.asp?layout=print_story&articleid=VR1117956996&categoryid=13
Posted: Tue., Jan. 9, 2007, 6:46pm PT
Paramount sells iTunes a library card

Netflix discovered very early that new releases were hard as heck to deal with in a DVD-by-mail business. Let's go back to when Netflix had 1,000,000 subscribers. If Netflix 'bought' 25,000 copies of a new release and it was popular, some subscribers would not get the DVD before it had aged into a catalog film. With no late fees and subscribers who wanted to sit on DVD's and/or share the DVD's before sending them back, there could be quite a delay in getting a significant number of the DVD's in and back out.

On the other hand, catalog films are more suited for a DVD-by-mail model. They are cheaper and very few titles are individually in great demand. As Netflix saw this unfold, they went to full spin mode.

The opportunity for Netflix arose from the fact that catalog films were hard to monetize in the traditional channels, especially in retail outlets like Wal-Mart, Best Buy, and others like that. There are tens of thousands of catalog films and putting them on shelves would be prohibitive anyway that you look at it.

[By the way, the kiosks that are being installed by the thousands across the country for movie DVD rental are stocked only with new releases, virtually speaking. It’s close to a perfect model for the next one or two years.]

I suggest that Netflix is going to have a serious problem when it becomes easier and cost effective for the studios to monetize catalog films in new channels. The beauty of catalog films in the download, VOD, IPTV, and the in-store kiosk download and burn models is that the inventory/shelf space issues disappear, practically speaking.

While Netflix has stated that they will be a leader in download and have announced that they will describe their plans for adding a download component to their business model, we will just have to depend on other little companies like Apple, Microsoft, and the studios themselves for now. I am pretty impressed with where Apple and Microsoft are going with this and I expect to be very entertained by Netflix’s announcement on January 24, 2007 of their plans to equal or exceed the efforts of greater, richer, smarter, more sophisticated companies. Did I mention better connected?

The point here is that things are evolving and not in Netflix’s favor – who do you want to bet on, if not now, 6 months from now, Netflix or Apple and Microsoft?

Regarding catalog films and new channels of distribution:


http://www.variety.com/index.asp?layout=print_story&articleid=VR1117956996&categoryid=13

[Hunter McDaniel]

With all of these potential download services, it comes down to whether are willing to compete with Netflix on price. Are they willing to let me watch what I want from a broad catalogue for 50 cents per hour - or are they still trying to get movie theatre/DVD purchase type prices?

Right now there are too many greedy hands looking for a cut to let downloads be competititve.

[type-cast]

"I would be interested to know what you think about the changes Blockbuster made to their online service."

It's often painfully slow to browse, add, or re-order movies. It takes forever if you want to remove more than one movie. I'm unable to change my ratings for some movies. Also, they seem to have removed all the reviews. All in all, I'd rather go back to the old website...

[type-cast]

"Right now there are too many greedy hands looking for a cut to let downloads be competititve."

They can't match the selection of a typical video store. Forget price. If they had more selection, including things not on DVD yet, they could succeed even charging a premium. But people won't pay more for LESS quality, LESS selection, LESS flexibility, and LESS special features. Downloads are still-born.

[Seth]

FYI - I hooked up a "relatively" inexpensive system to watch stuff from my computer on my tv. Now this doesn't speak to those who have the surround sound and such, but maybe someone can spin from there.

My video card has an s-video out. So I bought a 30-ft RCA cable - the red white and yellow ones. Bought a "y-adapter" that splits the audio output (the same one you plug speakers into on the back of your computer) into the red and white plugs. Also bought a converter for s-video to rca video plug (the yellow one) - cost: $30

What it allows is for my computer to treat the television as a second monitor, so anything I can watch in dvd player on the computer or media player, can now be seen and heard thru the tv.

[corey3rd]

Agent's deal is bogus - it's only 2 weeks free. Please have it removed.

There are enough TV critics who have made a career out of writing "Saturday Night Live is Dead" columns. I think people have had enough computer hard drives gone bad to really want to invest serious money into buying downloads. You only need to spill your Big Gulp to have your entire collection get sizzled.

[bebo]

People don't want to buy digital downloads of movies to OWN...its not same dynamic as Songs which people want to own to play over and over...

People want to RENT movie downloads, same as dvd's...on some kind of plan...

A queue coupled to a post-license rental (DRM unlocks on play AFTER download complete, thus allowing a queue of choices to download FREE in background) with a cap per month (10 movies per month for $19.90 = $1.99ea would work).

A peer-to-peer (maybe torrent based) queue feeder would work great esp. for new releases where the "swarm" would be gigantic (this is better for Netflix than dvd b/c of not having to buy/make 300,000 copies of a new release)

Apple could pull this off with a client/queue invisibly embedded in iTunes, feeding their iTV boxes on TVs throughout the household. But this requires consumer to have a Mac & an iTV box or three, and an airport, which is very high brow.

Will the studios allow this kind of service? Its all up to Walmart, which has huge leverage over the studios through dominant position in DVD distrib (they dabble EXTENSIVELY in pricing, digital release quality, inclusion of DVD extras in digital versions, etc.).

Netflix could pull this off by partnering with Walmart and a huge cable company. In any case, watch Walmart for a digital rental plan coupled to various cable companies and their new queue-oriented p2p fed set top boxes.

[hawk5391]

"What do you think? What would kill Netflix?"

I think it's either a stake through the heart or a silver bullet. I can never remember which.

[type-cast]

eMusic lets you re-download any songs you've gotten in the past. Any decent service would protect your investment. It's interesting to note that Apple's iTunes does NOT let people re-download things for free. You are screwed if you accidentally (or purposefully) delete something from Apple. Their music and movies are overpriced. These download services only care about money. They don't care if your PC fails, is stolen, or burns up in a fire. You pay them money and they don't care. Nice.

[hawk5391]

By the way, I think the post by Ricklogic is one of the most interesting things I have ever read on this site, particularly his analysis of Netflix's business model as it pertains to new releases vs catalog films. Props to you Rick.

[hawk5391]

"I would be interested to know what you think about the changes Blockbuster made to their online service."

I know this waasn't really the topic but I want to second type-cast's opinion of BB's site. These site issues are the primary reason I have chosen not to switch to BB, regardless of how many more movies I could potentially get at the same price point (although with the delays in BB shipping times, who knows how many more that could really be). In addition to the issues type-cast mentioned, I do not like the recommendations section at all -- I find it to be worse than useless.

BB may have some features that Netflix may never have (in-store trade-ins, video game coupons) but online they are a distant second. Considering how slow Netflix is to adapt to the market and its customers' wants and needs, that should be a truly sobering thought for BB management. If you can't beat someone who's not exactly playing at the top of their game, who can you beat?

[Andy Lester]

For me, what's going to kill NetFlix is their sending out of scratched, unplayable discs. Probably one disc in ten that we get (and we get a lot) is unplayable, either from scratches or cracking, which is especially aggravating when you're working through a series of discs in order, as my wife is currently doing through "Gilmore Girls". She might have three discs in the house, but if the first is unplayable, the other two don't matter.

At the very least we know that if we get a digital download, it'll work.

[Ethan]

I for one am shocked, shocked that Scoble made a grand pronouncement that was quickly weakened or debunked entirely.

"At the very least we know that if we get a digital download, it'll work."

This assumes that the majority of Netflix subscibers have hoop-de-doo internet connections, hard drive capacity, etc to handle the file sizes necessary to download feature films. Not to mention whatever DRM is added, not to mention that not everyone wants to watch movies on their PC. Lots of variables in play before Netflix or even brick+mortar video rental places collapse.

Oh, and I've had huge files end up being corrupt after hours/days of downloading, so no immunity there, unless Netflix is magical.

[smgpugfaw]

---Lets see here I have probably 10k invested in my home theater. Why would I degrade my home theater by watching a movie on my 21 inch computer moniter wearing headphones.---

I have no idea. Why did people abandon those same killer setups in favor of compressed audio on a little handheld device and a pair of earbud headphones?

I suspect there's a new generation who value convenience over quality and they will represent the majority.

Not saying I "get" it, just that the trends have ben established and the second downloading movies becomes convenient, DVD is on the way out. Much like CD's and the music industry.

[thecheshirecat]

I second f0am's comments. If you follow business news at all, you're aware that Best Buy and all the other TV retailers can't keep their big-screen, flat panel LCDs and plasmas in stock. Consumers are spending more and more to build up their home theaters (which is why movie theater owners were so worried about box office ticket sales, at least until Pirates 2 came out) - bigger, better, flatter(!), especially b/c everyone wants to get on the HDTV bandwagon (can you blame them? the picture is crystal!), a format that has been successful and is becoming available in more and more channels. As a result, the forecast is rosy, profitable skies ahead for high-quality TV manufacturers as consumers continue to aim higher and higher for the best TV on the market thanks to high-def- many have already predicted that all channels will eventually be available in HD so until that happens, there ain't no end in sight to consumers' apetites for high quality televisions. And in the endless cycle, TV manufacturers will continue spending money on R&D to get ever-advanced technology to build improved TVs. We just purchased a flat-screen 52" LCD kick-arse Samsung - I'm not even close to tempted to download a movie onto my comparatively itty bitty computer screen. I don't even like downloading stuff on ITunes! Lots of people have dayjobs, including myself, and don't want to use their spare time to download movies. Leave that to the college kids. I just want to have them in hand when I get home or have them immediately accessible. (On BBO: My time, like I'm sure for many others, is precious and I don't want to have to go to a store to return something and don't mind a business day or two business days' wait to have something available for me.) Even if they could get the variety of foreign, indie, black and white, classic and otherwise non-mainstream movies that comprise 65-70% of my Netflix Q, what if I wanted to check out the special features on a DVD for a movie (something I do almost 80% of the time)? Can a download replicate that? Can a download replicate the quality of a Criterion release of Seven Samurai or will I be stuck with some computer-formattable version? Would you have a choice between different releases of a movie or is it one uniform "downloadable" version? And something I haven't seen mentioned yet either w/the BBO discussion or the movie download discussion - I have about 25 Netflix friends that would basically be zapped if I canceled Netflix. It's one of my favorite features of Netflix to be able to easily share opinions with tons of people at once on movies you liked, disliked, etc. I don't know how a download could replicate this either.

[hueristix]

Netflix, and the DVD, has been declared dead again and again. (and I laugh)

Netflix- has told us they are not limited to the disc format, their programming and customer experience expertise will help them create one of the best DL options available yet, IMHO. When the tech. and studio prices finally click, they will be there on the forefront. Look how Apple entered the mp3 player market 'late' but their design and timing made for the perfect storm...

bandwidth:
For now, the bandwidth just isn't around quite yet to make downloading viable yet. If anything, PSP and ipod downloads make sense (at lower resolution) for riding the subway, etc., but not home theater DL yet.

HD war:
In the mean time- we are all getting hooked on HD, but confused betwen bluray and HD-DVD (I have both going) This format war will continue to support the rental as opposed to sales market. Also, the increase in disc/movie size in gigabytes makes downloading of HD content take much longer. Just as downloading a 4-9 gig olds school DVD begins to sound reasonable, now we have 25-50 gig HD discs to deal with.

Consumer Ease of Use:
At this point it is still much easier for the average consumer to take a small disc around with them that can be played @home, car, or laptop. It will take years to transition to downloads, even though the trip has already begun.

Bandwidth and ease of use aside, if the studios weren't so greedy, it wouldn't take so long- until they can provide HD quality for a decent price, I doubt many of us want to pay for 'low-res' crap when they can torrent it etc. Netflix is still the better value with better picture quality.

("now if you all take the special pills I gave you all I will SHOW you my theory" - Mr. Show)

Meanwhile I have over 100 HD and 480 movies in my queue, so I aint leavin the 'Flix any time soon. I am glad they have waited to join the game and I bet their plan is no joke.

[hueristix]

That is, over 100 HD and SD movies, to clarify.

[thecheshirecat]

smpugfaw wrote: "I have no idea. Why did people abandon those same killer setups in favor of compressed audio on a little handheld device and a pair of earbud headphones?"

What "same killer setups" are you referring to? Before ITunes, I was listening to my CDs on a boombox and/or my car - not exactly "killer setups!" ;-) I still listen to CDs in my car and hardly ever listen to my IPod w/headphones anymore. The BOSE IPod station is practically the only time I listen to it. And a good 70% of the songs on my Ipod are based off of my CD library. In addition, having an Ipod hasn't killed my CD habit off entirely. In other words, the habits you cited seem themselves to be changing.

"I suspect there's a new generation who value convenience over quality and they will represent the majority."

When you say "new generation" I assume you mean younger generations? I agree with you that they might value convenience over quality to the extent that perhaps younger people tend not to have stable incomes and/or jobs yet, or are still in school etc., so they probably don't own homes to build home theaters in and/or they don't have enough disposable income (other than what they get from mom and dad), relative to older generations, to be able to afford more costly "quality" items. But I disagree that they'll become the majority. Imo, it seems that as you age and start to earn your own money and have less spare time, you buy your first home, you start a family whatever, your experience (including w/consumer products) increases and you begin to want "quality" items. I've read several recent interesting business articles that seem to point to this "shift" of middle-market consumers wanting better things, including Wal-Mart reporting lower profits for recent fiscal quarter ends and trying to get more high-end (i.e., offering organic products) to appeal to their customers and stave off those losses. I've even read recent articles where upscale consumers are envious of even more upscale consumers! Not sure what this says about our society or whatever, but it's playing itself out. Also, younger generations are so saturated w/ over-the-top materialism, from Hollywood celebs of their generation to wildly popular shows on MTV like "My Sweet 16" that idolize luxury goods, I'm sure many of them see it as something to attain. If there wasn't a demand by people who couldn't afford this stuff (including young kids), you wouldn't see so many knockoffs of high-end clothes, purses and goods everywhere on the arms of young girls or around the necks of young boys. Remember the story about some kid getting killed for his Air Jordans? It's a sad, extreme scenario but it's definitely reflective of this pervasive idea that kids can appreciate and want to attain higher-end items. And plasma screens, if you ever watch MTV Cribs (a station that definitely caters to young generations as I can barely relate to it anymore!), that are hanging all over every spare wall space of these celeb houses, can easily be included in this category.

"Not saying I "get" it, just that the trends have ben established and the second downloading movies becomes convenient, DVD is on the way out. Much like CD's and the music industry."

- Understood, but I think the trends are far from established. I mentioned the HDTV format for live TV in an earlier post which has become a dominant trend and has fueled the major successes of high-end TV manufacturers as of late. Following the HDTV trend, what makes more sense than coming up with a high-def DVD format? So now we see the introduction of two of these formats and studios either choosing one or the other. While the high-def format hasn't played out yet, I believe movie downloads are in an even earlier stage of infancy than high-def DVDs and also seem inconsistent with the high-def DVD trend. It seems to me that if consumers are spending large amounts to invest in and adopt the HDTV trend en masse (as evidenced by the huge numbers of sales of TVs compatible with HD), they would rather see a return on those investments in their home theater rather than switch the viewing medium entirely (i.e., to a computer screen or Ipod screen via downloads).

[Ricklogic]

Netflix Subscriber Statistics
From SEC 8-K 1/9/2007
------------------------
It works in Excel and Word? Anyway, there are 6 columns. One key item is that the 2nd and 3rd Qtr's of 2006 show significantly slowing growth of 'Total Subscribers' on a percentage basis. 6.23% and 9.54%, respectfully, on a quarterly basis. These percents are less than half of most earlier quarterly growth percentages.
-----------------------------------

Quarter - Total Subs -- q/q-- Gross Adds ---Quit Netflix -----Net Adds
12/31/04----2,610------NA----------783--------402----------381
03/31/05----3,018---15.63%-------945--------537----------408
06/30/05----3,196-----5.90%-------707--------529----------178
09/30/05----3,592---12.39%-------921--------525----------396
12/31/05----4,179---16.34%-----1,156--------569----------587
03/31/06----4,866---16.44%-----1,377--------690----------687
06/30/06----5,169-----6.23%-----1,070--------767----------303
09/30/06----5,662-----9.54%-----1,310--------817----------493
------------------------------
From the table above, here's the column for how many subs quit the service each qtr from 4th qtr, 2004 to 3rd qtr, 2006
---------------
Quit Netflix
4th qtr, 2004 --- 402
1st qtr, 2005 --- 537
2nd qtr, 2005 --- 529
3rd qtr, 2005 --- 525
4th qtr, 2005 --- 569
1st qtr, 2006 --- 690
2nd qtr, 2006 --- 767
3rd qtr, 2006 --- 817
------------------
This is important because it shows that, over time, more than half the people who have tried the service quit. It reduces the pool of potential new subscribers and requires ever expanding marketing.