A headline in Saturday's Wall Street Journal aims to strike doubts about the viability of Netflix's (NASDAQ:NFLX) business model: "Netflix Could Get Snagged in Move to Net"
If you follow the thesis, digital delivery could be the end of the company's market dominance in loaning out celluloid.
"In the DVD world, Netflix's efficient and inexpensive service has helped it triple its subscriber base to nine million since 2005," claims the article. "But in the world of digital delivery, whatever competitive edge it enjoys is dulled."
This isn't the first time that someone has waxed pessimistically about the company's Web-tethered prospects.
"The future will be challenging to both the optical disc as a medium and the company's ability to compete in the cutthroat realm of digital delivery," I wrote this past summer.
"It's unlikely to be a leader in digital delivery," I wrote two years ago. "Yes, it's there already, but it has every incentive to lay a box of nails on the migratory road that will level the playing field, if not hand the leadership to online portals and cable providers."
DVD rentals have been very good to Netflix, with only Blockbuster (NYSE:BBI) stepping up to the challenge of building out the network of distribution centers necessary to compete, providing overnight delivery for the postage cost of first-class mail.
The same can't be said for broadband-delivered content. Between cable providers with video on demand and giants like Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) serving up video streaming and/or downloads, it's a crowded space.
I believe Netflix will make it out just fine. However, let me make my argument from a perspective that is beaming to you from three years in the future.
Party like it's 2012
Last January I took a look at what several actively traded companies may look like in 2010. Rather than come back this year with some 2011 prognostications, I'm going to go all the way out to 2012 in my time travel reports this month.
I didn't plan on kicking things off with Netflix, but the pessimism raised by the Journal piece over the weekend makes it a logical starting point.
Why should Netflix fear digital delivery? It has already set itself apart with its smorgasbord model. With nearly every major player going for a la carte pricing deals, Netflix stands out by including unlimited streaming, and at no additional cost to existing subscribers.
Is the offering sustainable? Netflix has just 12,000 of its more than 100,000 DVD titles available through online streaming. Every licensing deal is different. Some involve Netflix paying a flat fee regardless of viewership, while others follow the more conventional royalty schedules. Either way, this is obviously going to get more expensive to offer as the company widens its online title availability and more subscribers warm up to digital delivery.
Should Netflix worry? Let's take a step into the theoretical future and find out.
Three years hence
Netflix in 2012 isn't all that different from 2009. It is still a force in delivering video entertainment to end users. Online delivery is a major part of the company's model, though it still thrives on sending out optical discs in DVD and Blu-ray formats. Even though Wi-Fi connectivity is pervasive and most new television sets come with built-in connectivity, there is still demand for discs from folks who crave the special features, online games, and 100% uptime convenience.
Netflix will have made it through the digital migration by sticking to its knitting. Remember the 2008 deals to allow owners of TiVo (NASDAQ:TIVO) DVRs and Microsoft's (NASDAQ:MSFT) Xbox 360 access to Netflix's streaming service through their televisions? Well, Netflix will be available through nearly every broadband-enabled home theater device (yes, even Apple TV -- which finally became a market hit after some serious tweaks in 2010).
The all-encompassing Netflix service has become a popular complement to the more ruthless rivals in premium piecemeal streams. Those who figured that Netflix wouldn't have a digital advantage ultimately had to eat crow, because the Netflix recommendations engine that knows movie buffs better than they know themselves made it even more appealing. Netflix subscribers get superior custom-tailored film suggestions and even Amazon can't touch that, despite its pioneering ways in collecting customer preference data points.
People were paying an average of $13.60 a month toward the end of 2008. Four years later, they are paying closer to $20. The prices went up, with Netflix simply following the two leaders of 2012 DVD rentals -- Blockbuster and McDonald's (NYSE:MCD) -- higher.
Netflix is also making more than just subscription revenue. Some of the catalysts in 2012 include:
- Healthier growth in mailer-based advertising, offsetting fulfillment costs with more ads, promotions, couponing, and even demo discs.
- Shaking its recommendations engine moneymaker, Netflix partners with retailers to offer products like "DVD of the Month" services that are customized to subscriber preferences.
- Yes, Netflix finally got into video game rentals, though it is an exclusive deal with Microsoft for Xbox and Windows discs.
Don't fear the future. Embrace it.
I'll be back over the next few days with a glimpse at what other companies might look like come 2012.
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