Netflix's New Digital Distribution Will Improve the Bottom Line

by: Julia Boorstin November 20, 2008 | about stocks: MSFT / NFLX / SNE    

Julia Boorstin

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In the midst of the financial crisis, Netflix (NFLX) is busy transforming itself from a DVD-by-mail company to a true online content distribution service.

Wednesday, Netflix launched its latest in a series of new services, allowing subscribers to stream thousands of Netflix movies and TV shows through their Microsoft (MSFT) XBox 360 consoles at no additional cost (for Xbox LIVE Gold members). It sounds pretty easy: Netflix members add movie and TV titles from 12,000 choices to their instant queues on Netflix's web site, and those choices are automatically displayed on the Xbox Live screen. It really functions much more like video on demand, and is a great benefit to Netflix subscribers who own XBox consoles.

When Netflix was founded in 1997 it was all about rental-by-mail, but CEO Reed Hastings told me in an exclusive interview, his goal has always been to make Netflix the leading company for subscription streaming video. Now Netflix subscribers can stream to their PC and Mac computers, to certain Blu-ray high def DVD players, and through high def TiVos (TIVO). As of today, XBox is on that list.

Hastings tells me this strategy of adding new connections to its video library is working: the company has grown earnings per share every year for the past six years. The theory is that new ways to stream content entices subscribers and keeps them longer, while streaming, rather than mailing DVDs saves on postage costs. That doesn't mean the company is planning to lose the DVD-by-mail business any time soon, as consumers like the flexibility of getting both physical DVDs (to bring on planes, etc) as well as streaming.

What about the economy? Subscriber growth slowed in the company's third quarter, but it's still growing subscribers, and Hastings expects the company to continue to grow, citing the entertainment industry's track record to grow through recessions. After all, people would rather stay home and hunker down with a stack of DVDs, without having to buy any, than go out and spend big bucks on dinner and a movie. To that end, Hastings says that he considers everything from movie theaters to ad-supported Hulu as his competitors. All the more reason to make Netflix content more accessible.

One note: Xbox's biggest competitor is Sony's (SNE) PlayStation 3. My colleague Jim Goldman blogs about the fact that Sony pulled its movies from Netflix Xbox streaming service. We'll see if Netflix makes a similar deal to stream to Sony PlayStations, or if Sony realizes it would rather get the revenue from its film rights, rather than boycott its competitor.

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This article has 1 comment:

  •  
    Nov 20 10:24 AM
    The cost to Netflix to license and encode all of this content and pay Limelight Networks to store and stream all of these video is not cheap, let alone the development costs for the player and interface. Today, it is not improving their bottom line, far from it. They are spending a lot of money to make this happen and will have to continue to sink a great deal of money into this for some time to come. Not a bad thing, as they are planning for the future, but it is not improving their bottom line anytime soon.

    This is the main reason why to date, Netflix will not break out any of their costs around their digital distribution offering.
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