[opendtv] Re: News: Netflix CEO Dishes on Web TV

  • From: "Manfredi, Albert E" <albert.e.manfredi@xxxxxxxxxx>
  • To: <opendtv@xxxxxxxxxxxxx>
  • Date: Fri, 27 May 2005 16:59:20 -0400

Interesting perspectives in this article, IMO. But it
has its own blind spots. I like how Hastings gets past
the senseless IPTV hype, but I think he stops short of
the article under the thread "The New Laws of
Television" (Piracy is Good? The New Laws of
Television by Mark Pesce.)

First off, if Netflix migrates to an online
distribution model, which is an eminently logical next
step for them, they will have to depend on the updated
ISP nets and broadband last mile connections that the
telco or cable plants provide. And if cable companies
and telcos update their networks, as they are doing,
then they too can get into the game of offering huge
libraries of video material, for non-real-time

I guess I'm saying that the current IPTV and cable
"real time program" distribution models are not the
only model these two players can offer their customers.
Since people would have to rely on their broadband
provider to get this new Netflix service anyway, the
broadband providers can not only compete, they could
also block Netflix downloads, unless forbidden by law.

The other objection I have is that if the movie studios
are hesitatant to make their content available to
Netflix for online distribution, Netflix should wonder
whether the studios might have a point. After all, if
this content gets pirated, which it will, people will
soon discover they can bypass Netflix too! It might be
easier for movie studios to accept distribution of
their content only within walled gardens, where at
least there is a semblance of control.

Mark Pesce's thesis was that even the Netflix companies
of the world can be bypassed, once the "power of the
Internet" is unleashed. Which goes a step beyond this
article's vision.



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

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

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

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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