Netflix's Paltry Press Release

Not every press release is a gusher of positive spin. Netflix (Nasdaq: NFLX  ) announced today that its Instant Watching online streaming service -- a free offering for paying subscribers -- has clocked in with more than 5 million views since it launched six months ago.

It's a big, round number, but it seems a bit low when you consider that Netflix has 6.8 million subscribers. In other words, the average subscriber has checked out 0.75 movies or commercial-free TV episodes through the service since January.

Ouch. I kicked the tires shortly after the service was first offered. I was skeptical as I clicked on the "Watch Now" button next to Sherrybaby, but I walked away impressed. The uninterrupted stream loaded quickly, and the video quality was a lot better than I had feared.

However, that was back in January, and I haven't yet been tempted to try the service again. Maybe it's the selection -- less than 3% of the 80,000 DVD titles are currently available for instant viewing. Maybe it's that I'm part of the YouTube generation, squirming in my seat if I have to watch video clips on my computer that last longer than a few minutes.

Yet I thought that I was a service slacker after clocking in with just one view. It turns out that I'm an above-average user of the service. I'm certainly tempted to revisit The Matrix or catch some of my favorite episodes of The Office, but viewing lengthy videos online just doesn't seem to click with me or most other modern computer users.

Remote control, ottoman, and you
I'm more at home with a service like Amazon.com's (Nasdaq: AMZN  ) Unbox, which can deliver flicks directly into my television set through my TiVo (Nasdaq: TIVO  ) . I also prefer DVDs from Netflix and Blockbuster (NYSE: BBI  ) , which I can pop into my living room or bedroom DVD player and watch on a bigger screen than my monitor.

Sure, I know there are connectable solutions to get Web streams into my television set. I just don't feel compelled to speed up the convergence when Amazon-TiVo are providing a more logical solution for couch potatoes.

So where does Netflix go from here? In launching Instant Watching, Netflix felt compelled to cap the service's usage. You're only entitled to one free hour of viewing for every dollar you pay in your monthly subscription plan. In other words, members of its most popular plan -- the $17.99 a month plan that allows for unlimited rentals with no more than three DVDs out at any given time -- can watch 18 hours a month.

Maybe some users are maxing out on the service, bumping up against the cap month after month. But if that's the case, how many other subscribers have no interest in taking Netflix up on that offer? After all, the average subscriber has consumed about an hour -- total -- of Instant Watching since the program was launched six months ago. (It's worth noting that the online streams are for PC users only at present, leaving any Mac-owning Netflix customers out of luck.)

Maybe Netflix is happy to find its customers slow to adopt this subscriber freebie. The moment consumers are smitten by digital downloads, the moat's all but gone. The company's proven mail-delivery system and its network of dozens of regional distribution centers won't matter. Netflix will still have its smarter recommendation engine, but it'll be hard to compete with the instant gratification of rival digital distributors like Amazon, Apple, and even discount-happy Wal-Mart (NYSE: WMT  ) .

Embrace the disgrace
Maybe the unimpressive numbers in Netflix's press release are actually intentional. As a pool of 6.8 million subscribers, we prefer to have our Maggie Gyllenhaal, Keanu Reeves, and Steve Carell fixes delivered in red rectangular envelopes, rather than squeezed onto our tiny monitors. Cheers for the mailman! Let's celebrate the failure of our flagship model's eventual obsolescence!

Well, I'm not going to fall for that. Netflix needs to get ahead of the parade route, and stay there. It can't let Amazon and TiVo -- or that Apple TV gizmo, or a spigot of Comcast (Nasdaq: CMCSA  ) on-demand freebies -- grab the bandleader baton. That's where Netflix needs to be.

Even if Netflix isn't ready to broker a deal for a set-top solution, it needs to do a better job of establishing itself as a company on the forefront -- not the backcourt -- of digital delivery.

My suggestion?
Kill the caps, temporarily. Whether it's just for the month of September or through the end of the year, eliminate the Instant Watching caps and shout it from the rooftops. Get consumers hooked on Netflix. Make them laugh at the "convenience" of free in-store rentals by rival Blockbuster's Total Access plan. Give subscribers the digital buffet that they already enjoy in DVD form. Promote it loudly.

Get in front of that parade, Netflix. If you don't, your customers may end up seeing fewer bright red mailers, and more bright red exit signs.

For more Foolish thought on this digital media craze:

Amazon.com and Netflix have been recommended to Stock Advisor subscribers, while TiVo is a former selection. Wal-Mart is an Inside Value newsletter service stock selection. Try any Fool newsletter service free for 30 days.

Longtime Fool contributor Rick Munarriz owns shares in both TiVo and Netflix. He also is an early adopter of both services. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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