Here is my prediction for how NF's VOD initiative will play out, and how I currently handicap NF's prospects. Become a Complete Fool
First, NF management has said that it has no interest in downloading to computers, which makes sense for reasons I outlined in my prior post on this topic. VOD-to-computer is a small market, and NF would face stiff competition from Movielink, and from the likes of Apple, Dell, Yahoo, Microsoft and AOL, all of which have access to a much bigger customer bases than NF and have a strong Internet presence.
So, it's going to be VOD-to-home-theater, with TiVo (or some other DVR) serving as the set top box. You need a set top box because the Internet is not reliable enough to stream broadband in real time, won't be for many years. It won't be a cable company box, because they have will have their own VOD products and won't want to support third party downloads.
My prediction is that NF will announce a collaboration with TiVo, will merge with/buy TiVo, or will offer a barebones DVR themselves (built by Phillips or someone else). The TiVo/DVR will be enhanced to play back some highly efficient encoding scheme to be used for sending content over the Internet. It will also be enhanced to implement some sort of copy protection scheme to make the studios happy. You will buy a wireless router to connect to your broadband modem (if you don't already have one), and wireless adapter to connect to TiVo/DVR. Or, the next generation TiVo/DVRs will have a built in wireless adapter. You'll have your choice of using the TiVo/DVR interface to access NetFlix (kind of like WebTV) or use your computer to pick movies as now. There will be a setup procedure to get your TiVo/DVR and NF servers to communicate seamlessly. You will place orders and downloads will be sent through the wireless router to the TiVo/DVR. Once a download is complete (or sufficiently in progress), you access the movie just like on TiVo now.
How long it takes to complete a download will depend on the speed of your broadband connection, congestion on NF servers (if any), and general congestion on the Internet (if any). But probably they can get it so you'd only have to order an hour or so in advance. Smart people will just order movies over night or days in advance, since it will be sitting right there on TiVo/DVR to watch whenever. You could have it set up so that as soon as the movies at the top of your queue are available they will automatically be downloaded (space on your TiVo/DVR permitting...).
In terms of pricing, NF will move away from all-you-can eat pricing. There will be a fixed monthly subscription (gotta have that to keep people captive) that gets you some number of "free" downloads and then you'll pay incrementally. (By the way, I predict they will migrate their DVD-by-mail business to this model also. The all-you-can eat model works when it is a week roundtrip for disk, but not when it's two days).
If TiVo does this at all it would be natural to partner with other companies besides NF for the scenario above, such as Movielink, which is run by a consortium of the five biggest Hollywood studios (some of which also have a stake in TiVo).
Also it would be a natural for Dell and Apple to offer their own DVRs and extend their current music download service for video using the same kind of scenario described above. In fact, I'd say this is definitely going to happen.
And it can be expected Microsoft, Yahoo and AOL will somehow try to get in on the game. Microsoft already has their UltimateTV DVR. They could adapt it to connect with wireless routers per the above scenario. AOL already has their one DVR for use as a set top for Time-Warner cable, and that could likewise be adapted.
To the extent that the broadband modem=>wireless router=>DVR=>TV scenario comes to pass and proves popular, the cable companies will accelerate their VOD offerings. Cable companies will have the advantage of (1) real time delivery, (2) simplicity (no wireless routers, no TiVo, no separate VOD subscription unless you want one). They will price in such a way that do not lose significant share to NF or other internet-based VOD companies. This is their turf and they will be brutal in protecting it. Look at how they have been treating TiVo. Instead of partnering with TiVo they started developing their own DVRs. This will put a ceiling on what NF or anyone else can charge for VOD. They may also limit the bandwidth they make available for internet movie downloads and hobble third-party VOD that way.
The bottom line is NF will be in direct competition with the cable companies, Dell, Apple, Microsoft, AOL and Movielink. It will be a field crowded with rich, motivated and savvy competitors who have been salivating over a piece of the VOD pie for years. It will not be Wal-Mart dipping a toe into DVD-by-mail, or BBI being dragged into DVD-by-mail kicking and screaming. NF will not have the open field in VOD it had in DVD-by-mail.
In the end, NF will be, in the very best-case scenario, the biggest among a large number of worthy competitors, with maybe a 20% long term share of VOD. More likely, it will keep chugging as a niche player getting most of its revenue from a declining DVD-by-mail business.
Speaking of acquisition, it is worth considering how attractive NF might be as an acquisition target. Those 1.5 million-and-counting loyal customers could definitely be a great asset for some other company that wants to jump-start their VOD effort.
The catch is, just who would this theoretical buyer be? Even the largest cable company in the country would only have cable running past a fraction of existing NF customers, and they already have access to most of those customers as their cable provider. They don't need NF's customer base.
A media company would only be interested in buying NF if it could use it as a front-end service for offering content from all media companies, but why would the other media companies get on board with a service run by one competitor company? They wouldn't.
TiVo, which is partly owned by a number of media companies, would make sense as a potential buyer, but they don't exactly have $2 billion lying around. Their market cap is less than a half of NF's. Its more likely NF would buy them.
Then there is Apple, Dell, Microsoft, Yahoo or AOL. But why would any of these companies be interested in paying about $500-1000 per NF customer? NF states that it costs $30-35 to acquire a customer. NF is of course worth more than $30-35 per customer because they have other tangible and especially intangible assets (e.g., a great brand). A would-be competitor would have to spend a lot more than $30-35 per customer to get them on board with VOD. But I assure you, nobody is going to be able to go to a board of directors and pitch an acquisition of NF at a many-fold premium over the NetFlix-per-customer-acquisition price, especially when they would have little intrinsic interest in the DVD-by-mail business--the main asset they would be getting. If you're going to spend a billion to ramp up VOD, why not give away a barebones DVR and wireless router at a cost of $200 each to the first 5 million customers that call your 800 number and sign up to a one year contract?
Finally, we have Movielink. But I still don't see why they would pay very much for NF, especially when their owners are going to get their cut of most movie downloads no matter how it is physically delivered. But they would make the most sense as a potential buyer.
So, there is no buyer I can see that would pay a large amount per customer for NF. I think the most likely scenario is NF ends up an also-ran player in the VOD space, and won't be an acquisition target unless its price falls precipitously.
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Here is my prediction for how NF's VOD initiative will play out, and how I currently handicap NF's prospects.
Become a Complete Fool