[opendtv] News: Netflix CEO Dishes on Web TV

http://www.redherring.com/Article.aspx?a=12195&hed=Netflix+CEO+Dishes+on+Web+TV&sector=Industries&subsector=EntertainmentAndMedia

Netflix CEO Dishes on Web TV

Reed Hastings says cable, telecom, and satellite companies just don't 
get the business model of the Internet.

May 26, 2005

Netflix CEO Reed Hastings sounds a little like a character in the new 
Star Wars film as he talks about the future of video on the web.
 
He expects "an epic battle ahead between the forces of control and 
the forces of freedom that will play out over the next 10 or 20 
years."
 
That may sound like science fiction, but the scenario is real enough. 
And the future of Netflix depends on its outcome.
 
With the stakes so high, Mr. Hastings is not afraid to call a winner. 
"The future of video is web television, not what companies are now 
calling IPTV," he said this week during an interview with Red Herring.
 
As Netflix has grown its online DVD rental service to 4 million 
subscribers, giant competitors like Blockbuster and Wal-Mart have 
jumped into the market. The big players have validated the business 
model, and offered Netflix its chief competition, at least for now.

But looking far, far into the future, the next generation of 
competitors will come from companies that are now investing in 
video-on-demand and IPTV services. The telcos, cable companies, and 
satellite companies are spending billions to deploy the networks to 
supply digital content straight into the home, and companies are 
already offering select services in several cities.
 
The reality of IPTV is far off, but as technology grows commonplace, 
the DVD won't be the medium of choice. When homes are rigged with 50 
to 100 megabits of bandwidth, consumers will want immediate access to 
digital video in their homes.
 
Companies that lay down the pipes, like cable operators or telcos, 
will fight companies that sell service distribution service over the 
Internet.
 
"Netflix can likely beat the telcos in the online video distribution 
game, but cable will be much harder," said Laura Behrens, an analyst 
with Gartner G2. Cable has already invested in the network 
infrastructure and done major deals with movie studios to distribute 
content.
 
Mr. Hastings knows that online distribution will be the company's 
future down the line, but he is quiet on the details. Last year, 
Netflix announced a deal with TiVo to develop technology for a joint 
entertainment offering and pledged to work with Hollywood studios to 
secure content for digital distribution.
 
Mr. Hastings said Netflix will start offering direct Internet service 
this year, and will dedicate 1 to 2 percent of its annual revenue to 
the service over the next five years. With $506 million in annual 
revenue last year, that's roughly $5 million to $10 million for the 
offering each year. "All I can say is the first efforts will be 
underwhelming," said Mr. Hastings.
 
Content Is Still King

Mr. Hastings notes that the biggest barrier to the online 
distribution model is content. Movie studios are deathly afraid of 
online distribution because piracy over the Internet is already 
cutting severely into their business model.
 
In a true sign of what piracy and online distribution can do in the 
new era, hours before the world premier of the latest Star Wars film, 
the movie was available for download from the Internet.
 
It's a situation with which the big telecom, cable, and satellite 
companies struggle. But Mr. Hastings thinks these companies are 
making a mistake in underestimating the power of the Internet. "They 
don't get the economics of open system innovation," he said. "They 
get very well how to do the economics of proprietary systems and it 
is fundamentally a different ecosystem."
 
Mr. Hastings points to new mediums like blogs and podcasts as 
emblematic of the rapidly changing media landscape that runs over the 
Internet. IPTV companies will create 200 or 300 channels, while the 
web will have more like 5 million, he predicted.
 
Already, companies willing to embrace the economics of the 
proprietary model are trying to beat Netflix in the online 
distribution space.
 
At a symposium at Stanford University in Palo Alto, California, on 
Wednesday entitled "Next Generation Media Networks" (see Desperate 
Telcos Push IPTV), Bob Greene, senior vice president of Advanced 
Services at Starz Entertainment Group, stated, "Netflix can not 
replicate the subscription model online because it violates our 
rights. Our subscription model does not run out until something like 
2011, 2012, 2013."
 
Although Mr. Hastings won't discuss the accuracy of Mr. Greene's 
comment directly, that kind of outlook, concentrating on locking up 
content for decades, is the "the ultimate proprietary view," he said. 
"We are more like a Yahoo or Microsoft with an emphasis on openness, 
variety, and selection."
 
Blockbuster Battle

For now, though, Blockbuster is the company's biggest threat over the 
next year. With Blockbuster pledging to spend $120 million on 
marketing this year and pushing to gain 2 million subscribers by 
2006, the company could easily outspend Netflix.
 
Competition from Blockbuster even caused Netflix to drop its prices 
last year from $22 to $18 per month, and has forced the company to 
run at a break-even rate, dedicating 18 to 19 percent on marketing 
costs. The high spending has caused the company to report a loss of 
$8.8 million for its most recent quarter, with a projected loss of 
$15 million for the year.
 
But the plan is to get big, fast, battling Blockbuster in the short 
term, and using the DVD business model to pull its subscribers into 
the Internet distribution future.
 
In a signal of Netflix' success last week, Wal-Mart announced it was 
getting out of the online DVD rental market and referring its 
customers to Netflix. Although Mr. Hastings won't disclose the 
financials of the deal, he said the partnership was a symbolic 
victory and a psychological boost for the company.

 
 
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