A Streaming Company

Friday, November 26th, 2010

Netflix considers itself a streaming company, which also offers DVD-by-mail:

The dilemma for Hollywood was neatly spelled out in a Netflix announcement Monday of a new subscription service: $7.99 a month for unlimited downloads of movies and television shows, compared with $19.99 a month for a plan that allows the subscriber to have three discs out at a time, sent through the mail, plus unlimited downloads. For studios that only a few years ago were selling new DVDs for $30, that represents a huge drop in profits.
For the first time, the company will spend more over the holidays to stream movies than to ship DVDs in its familiar red envelopes (although it is still spending more than half a billion dollars on postage this year). And that shift coincides with an ominous development for cable companies, which long controlled home entertainment: for the first time in their history, cable television subscriptions fell in the United States in the last two quarters — a trend some attribute to the rise of Netflix, which allows consumers to bypass their cable box to stream movies and shows.

Netflix now has the frothy stock price to show for its success. The stock has enjoyed a Google-like rise, nearly quadrupling from its 52-week low in January, and with a market value of nearly $10 billion, Netflix is now worth more than some of the Hollywood studios that license movies to it.

In some ways, the closest parallel as a one-stop digital marketplace is iTunes, the Apple service that has put itself at the center of the digital world and has used that power to demand concessions from its suppliers.

Netflix offers a new source of revenue for the studios — but it also presents a threat to their current revenue streams:

“As the home entertainment industry comes under pressure, they are the only guy standing there in a red shirt writing checks,” said Rich Greenfield, an analyst at BTIG Research. “That makes Netflix really unique right now.”

The biggest check came a few months ago, when the company spent nearly $1 billion to stream movies from three Hollywood studios — Paramount, MGM and Lionsgate.

Steve Swasey, the company’s vice president for communications, said, “As we move from paying U.S. postage to acquiring movies and television episodes from the studios and networks, Netflix can become one of their top customers.”

But digital economics can be much less lucrative to content companies. For example, under the terms of Netflix’s deal with Starz, the pay-TV channel, which allows Netflix to stream movies from Sony and Disney, Netflix pays about 15 cents a month for each subscriber, much less than the $4 to $5 a month that cable and satellite owners pay for access to Starz, according to research by Mr. Greenfield.

For that reason, Netflix is increasingly viewed as a threat by cable companies and movie studios, who are considering a variety of ways to put the brakes on the company’s growth.

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