Netflix Earnings Show Accelerating Move to Digital: Can Others Keep Apace?

It's disconcerting how slowly some media companies are moving to digital distribution models when their legacy business models appear to be rapidly evaporating. Now they may have more reason to be concerned: Recent online numbers indicate the move to digital may be accelerating.

The recent Netflix Inc. (NFLX) earnings demonstrated this clearly, as the company benefited from better subscriber growth due to uptake of digital movie viewing. New subscribers flooded into Netflix, driving its total sub number to 9.4 million, well past estimates. Netflix beat consensus analyst expectations for its quarterly revenue and earnings numbers. But most importantly, Netflix executives said they see an uptick in digital views via streaming through devices such as Roku and Xbox.

So, you might wonder whether traditional media companies are taking notes.

Barclays analyst Anthony J. DiClemente recently expanded on this idea in a recent report on Netflix's conference call, entitled, "Is Digital Delivery Here? Ask Netflix."

"Netflix commentary indicates that millions of its subscribers have used the Netflix streaming capabilities," wrote DiClemente. "It is becoming easier and less expensive for consumers to watch Internet-streamed video on the screens."

DiClemente may become known as the "Doctor Doom" of the traditional media industry, as he has repeatedly pointed out that the transition away from traditional media channels such as VHS and DVD and toward digital has left the industry flat-footed. His big "sell" call on traditional media in July appears to have been correct, at least so far.

DiClemente observes that the recession could be accelerating the move to digital. "In our opinion... anecdotal evidence suggests that the value proposition of digital may prove even more powerful in a recessionary environment."

Good points, all. Given that this acceleration to digital actually helps companies such as Netflix, which produced good subscriber growth and beat estimates, you have to wonder why the traditional content companies can't do anything to take advantage of the shift to digital.

The Barclays analyst even has some advice for media companies in his recent note. That advice includes:

1. Make online content easier to access consumers.
2. Accelerate "day-and-date" video-on-demand content.
3. Cut expenses for marketing, distribution, and production of content.

It all makes sense. The question is whether any of the big media companies such as Viacom Inc. (VIA), Walt Disney Co. (DIS), and CBS Corp. (CBS) can in fact turn their large content battleships around fast enough to fight the new battle. By the looks of it, they may have to start changing their models even more quickly.

Comments

[jkk:]

caution -NFLX will be priced out in streaming - More broadband caps coming - caution

increased broadband fees for heavy users plus the tiered premium packages for streamers - it is difficult to see how NFLX can compete on price in the future of streaming

see here time warner expanded its bandwidth caps because of online video streamers - possibly coming to a city near you
www.cbsnews.com/storie......

i wouldnt bet against the cable/telcom companies

although NFLX will most likely fail at trying to become a media content distributor over the internet- streamers are still going to get a huge choice of online subscription plans to sign up to, plus with discounts through cable companies and an exemption from bandwidth caps for streaming. (see Starz Play is available to FIOS cusomters for $5.99 see here - www.starz.com/channels...; Lions Gate with others is coming out with a monstor online subscripton streaming plan (the Epix channel)- see here news.cnet.com/8301-102...... ; also HBO is coming out with its own streaming subscription plan - and free to Time Warner customers - see here www.hbo.com/events/hbo...... (this is what NFLX wants to add for $10 more a month)

I may even partake in some of these plans if cable does not get up to speed with their VOD subscription offerings. Many of the new TVs are also allowing connection to the internet so you could stream the plans. Also sure that all the game consoles, and other boxes will allow for these plans in near future.

so although NFLX is spending alot of mail rental profits on streaming as an added benefit to subscribers with no additional costs currently - and this is clearly good for them so to gain customers and not to lose customers to other DVD rental competitors - it appears that NFLX will be priced out of any full transition to streaming in the future - and this is so even if broadband caps are not put into place cause cable telcom could easily tweak broadband and online streaming packages to price out NFLX

the studios hate NFLX redbox blockbuster and similar services and are trying to figure ways out of this area - and with DVD sales down significantly a transition to all digital may come alot sooner than later

maybe that is why insiders are selling like crazy cause they know NFLX is doomed

very exciting stuff happening though with digital media over the next year -

Feb 04 09:57 PM

[Nick Gogerty:]

NFLX is making the right move and going to where the puck will be not where it is. In 5 years digital distribution will be common and commodified with players embedded in everything and cable co's just playing the role of pipes in many situations. Buy offering a cheap bundle nflx reduces potential churn, spurns new entrants etc. and gets it. People don't care about download vs. dvd, they seek convenient cheap entertainment. NFLX is skating to where the pick is going to be. That being said the business will be just a commodified distribution business and shuffling bits doesn't have the same moat as physical dvd mailers. The customer base will grow, the ARPU and margins will shrink, potentially leaving them roughly where they are today as a company from a cash flow perspective. The value will got to customers courtesy the invisible hand of market competition.

Feb 05 09:13 AM