If you've been following along this week (here, here, here, and here), you'll realize that I'm a long-term bull on the prospects of video-content provider Netflix
Even the strongest supporter, however, cannot ignore the challenges a company faces. How these and Netflix's responses play out over the next few years will determine the fate of the company and any investment in it.
If News Corp.
However, making this happen successfully requires a bigger shift in thinking than many executives seem to be capable of. Television entertainment would not be the first industry where the old guard couldn't change rapidly enough to handle an upstart. Time Warner's CEO Jeff Bewkes seems to be a case in point, calling Netflix a 400-lb. chimp and comparing it with the Albanian army. In a recent CNBC interview, Netflix's CEO Reed Hastings politely said Bewkes was joking and then proceeded to produce a set of "Albanian army" dog tags, pointing out that he and his team are willing to work harder.
Hastings said Netflix is "focused on making our service better and better. And that's more content, better personalization, better U.I. ... 'Cause the better our service is, the more our consumers will love us."
Other subscription services
Hulu Plus and Amazon.com's
In order to effectively compete and acquire content so that subscribers would be willing to stay, any competitor would need to know in depth what its customers watch or use the "spaghetti" model I described previously. Netflix has a 10-year head start in collecting this information.
ISPs, usage caps, or throttling
ISPs can impose usage caps, charging $1 or more per gigabyte above some limit, even though marginal costs are very low. In fact, this is a problem in Canada. Netflix's solution was to lower the video quality some so that customers were less likely to exceed their caps.
I would expect, however, that customers will push back against such charges. And if Google's
Another problem arises if ISPs charge Netflix for the right to pass along data to the customer, even though Netflix already delivers the data to the "front doors" of the ISP. This already happens with some ISPs. Or, ISPs could selectively slow or block Netflix's data (or favor others preferentially) or get Netflix to pay to avoid a slowdown, which would be akin to extortion. Netflix is arguing vociferously that, "[ISP] customers already pay them to deliver the bits on their network, and requiring us to pay even though we deliver the bits to their network is an inappropriate reflection of their last mile exclusive control of their residential customers." This issue might end up in the courts.
If targeted ads become successful enough so that Google and others are paid more than they currently are, then free, ad-supported content could become the dominant Internet video model. Personally, I find targeted ads a bit creepy. Besides, one must ask how many people would willingly sit through advertisements, even well-targeted ones, just to save a few bucks per month, especially when the option is to be freed from the tyranny of commercials.
Interesting factoid: I like the old Perry Mason episodes from the 1950s and 1960s; these are 52 minutes long, leaving eight minutes for advertising, which, of course, Netflix doesn't have. When I watch the more recently produced The West Wing, however, the episodes are only 42 minutes long, leaving 18 minutes for ads. Not having to watch even more ads makes me ask "Why should I go back to advertiser-sponsored fare?"
Pay-per-view for movies or TV seasons could be consistently priced at $1, instead of $2 to $10 (or more). This might be cheap enough to shift subscribers away from Netflix in large enough numbers to hurt. However, the "all you can eat" model Netflix uses -- for less than the price of many single movies -- is very appealing.
In the end, of course, there will be more than one successful model. I fully expect Netflix to be one of the major players for years to come, overcoming challenges as it has in the past.
Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Amazon.com and Netflix are Motley Fool Stock Advisor recommendations. Alpha Newsletter Account, LLC has bought puts on Netflix. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Fool analyst Jim Mueller owns shares of and has an option position in Netflix along with owning shares of Amazon. He works for the Stock Advisor newsletter service.
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