Netflix Thinks Inside the Box

A box? Really, Netflix (Nasdaq: NFLX  ) ?

The leading DVD-rental-by-mail company is introducing a set-top box, easing the migration of its PC-based streaming service to your living room.

The company has teamed up with a Web radio appliance specialist to produce The Netflix Player by Roku, and there are a few things working in the device's favor. At a reasonably cheap $99.99, it's hard to beat the price. Eat that, Apple TV! Sure, it doesn't come with a hard drive or iPod/Mac/PC media integration. It does, however, have built-in Wi-Fi (and an Ethernet port for the wired set) to stream films after roughly a minute of buffering.

The player's biggest selling point is that access to digital movies and TV shows is free for Netflix's 8.2 million members. Netflix began allowing streaming of select titles last year, at no additional charge for active subscribers. 

That places Netflix ahead of rival Blockbuster's (NYSE: BBI  ) MovieLink pay service and the recently shuttered MovieBeam set-top box, which was championed by Movie Gallery until its December demise.

Slam dunk for Netflix? Not so fast. I've been a Netflix subscriber since 2002, and I'm not rushing out to buy this puppy. Here are a few reasons why an early adopter like me is showing some uncharacteristic restraint here.

1. I have enough boxes already
"We have LG plus three additional partners actively working on integrating our technology into their products," CEO Reed Hastings said during last month's quarterly conference call.

Roku is obviously one of them, but the other two -- according to Hastings -- "sell millions of devices per year and will enable the Netflix functionality in some of those devices likely in the fourth quarter of this year."

Spoiler alert: How can Hastings refer to anything other than TiVo (Nasdaq: TIVO  ) and Microsoft's (Nasdaq: MSFT  ) Xbox 360 as these mystery appliances? As I pointed out last month, "They fit the bill and are chummy with Hastings, with the outspoken Netflix CEO actually sitting on Microsoft's board of directors."

Since I already have both a TiVo and a 360, do I really want to add one more contraption to my living room? The Roku isn't exactly stylish, but it's as compact as a broadband modem. I just don't need a redundant device.

If only Netflix would let us all know the future devices already in our homes that will do what Roku does. There will be a few upset buyers come November, once they realize that their video game console or DVR can do the same thing as the box for which they paid $100.

2. The selection is sparse
Just 10,000 titles from Netflix's library of 100,000 are currently available for online streaming. With a few exceptions, they aren't the marquee titles. Studios with new releases to milk won't settle for the royalty peanuts they stand to receive through a free streaming service. The selection is limited to older films, television shows, and newer independent or foreign films.

There are certainly plenty of gems among the streaming selections, including Blade Runner, The Office episodes, and last year's hauntingly unheralded The Orphanage. However, most cable companies, like Comcast (Nasdaq: CMCSA  ) , also offer plenty of free pay-per-view content, often in high-def. 

There is also the rub of having to add a movie to your Netflix queue via your computer before it becomes available on the Roku box. Netflix promotes that as a feature, to remove TV-screen clutter, but it complicates the process by putting more preplanning into the streaming effort.

3. Models change
"For a one-time purchase of $99, Netflix members can watch as much as they want and as often as they want without paying more or impacting the number of DVDs they receive," Hastings notes in this morning's press release.

That sounds great, but will it last? Netflix already alluded to taking margin hits on its instant streaming service last year. Consumers get the films for free, but Netflix still has to pay for the bandwidth, and give the studios their cut for the content.

It's not very conducive to watch an entire movie squinting into your computer monitor, but couch potatoes can log hours in front of the boob tube. What happens if living-room streaming becomes too popular?

For now, the box is a great retention tool. Anyone who forks over the money for a Roku box is unlikely to cancel their Netflix subscription anytime soon. The offering really helps Netflix stand out from physical DVD renters like Blockbuster, as well as online beamers like Apple (Nasdaq: AAPL  ) and Amazon.com (Nasdaq: AMZN  ) .

If online costs skyrocket, Netflix has several options. It can charge higher subscription prices to customers with online streaming, or begin to charge for premium titles like new releases. Unfortunately, those moves betray Hastings' original statement, which promises members unlimited streams without paying more after making the one-time box investment.

The only real solution would be to serve up advertising to help offset some of the costs of the home theater streams, but that opens up another can of worms.

The Roku box ultimately leads Netflix into a battle it'll be hard pressed to win. If the box is a hit, it may be an unsustainable model. If it's a dud, early adopters will be stuck with $100 paperweights.

I'm sure that many of those 10,000 titles have happy endings. Let's see whether Netflix can fish one out here.

Stream this online Foolishness:

Netflix, Apple, and Amazon.com are recommendations for Motley Fool Stock Advisor newsletter subscribers. Microsoft is an Inside Value recommendation. You want a price break? A 30-day free trial subscription will take you there.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He also owns shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 648824, ~/Articles/ArticleHandler.aspx, 10/1/2014 8:24:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement