Netflix faces battle in streaming content

Netflix faces stiff competition in streaming content from cable providers Comcast and Time Warner Cable.

By TheStreet Staff Feb 22, 2010 1:18PM

TheStreetBy Jason Notte, TheStreet


Netflix (NFLX) is pushing the envelope it wants to escape, but the company's strictly digital future faces a very long wait.


Netflix's deal for new releases and streaming content with Warner Bros. announced in January, expansion of streaming service to all three major gaming consoles by spring and growth amid the misfortunes of its disc-renting counterparts all coincided with an 81% hike in Netflix shares during the past year. Netflix's earnings last quarter were just as rosy, as $444.5 million in revenue brought its 2009 take to $1.9 billion, or 22% more than 2008, and 1 million more subscribers swelled Netflix's ranks to 12.3 million.


Netflix, which aims to boost net income as much as 18% this year, is slowly moving away from its DVDs-by-mail business model that was a huge innovation when it was launched a decade ago. However, Netflix faces stiff competition in streaming content from cable providers Comcast (CMCSA) and Time Warner Cable (TWC), which are looking for new ways to wrest money from millions of subscribers.


Chief Executive Officer "Reed Hastings and the others founded Netflix and named it Netflix instead of DVDs By Mail because the idea was always to deliver movies over the Internet," says Netflix spokesman Steve Swasey. "If you make the same prediction long enough, you're going to be right, but it's been a slower evolution than we've envisioned."


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In 2009, 48% of Netflix subscribers watched streaming content versus 28% in 2008. The success of the company depends on its ability to secure new content and find more ways to deliver it to customers' TVs. Hastings envisions an all-streaming future for Netflix by 2030.


Netflix's agreements with Microsoft's (MSFT) Xbox 360 and Sony's PS3 have been a success, and soon it will stream content through the Nintendo Wii. The expansion allowed Netflix to sell its stake in Roku for $1.7 million, while maintaining a presence on the Roku video player. Netflix has also found its way to customers through certain Blu-ray players and televisions, and through TiVo (TIVO) units.


Studios have taken notice. In early January, Netflix and Warner Bros. said the expanded their agreement, bringing more of the entertainment company's content to Netflix. Independent film houses like the Criterion Collection, Oscilloscope Laboratories and Regent Releases have signed streaming deals within the past month.


While those agreements should help Netflix attract new customers, they don't guarantee its success in streaming content. Comcast and Time Warner Cable offer on-demand video services and reach 70 million cable and Internet customers combined. Comcast could gain an edge with the acquisition of NBC Universal.


Netflix has already expressed concern to the Federal Communications Commission about a "managed services" loophole that those providers could use to shrink bandwidth and choke streaming content.


Netflix also has to react to disruptions in the DVD rental market. Blockbuster (BBI) lowered its expectations for 2009 amid store closures and Carl Icahn's departure from its board. Movie Gallery filed for bankruptcy and announced it would close 1,000 stores. Wal-Mart (WMT) and Target (TGT) have limited sales of new-release DVDs to five per customer, removing a Netflix supply option and creating a conundrum for Netflix's competitor RedBox , which uses retail copies to stock kiosks and work around 28-day delays imposed on it by Universal, 20th Century Fox and Warner Bros. RedBox sued Warner Bros. unsuccessfully while it struck deals with Sony, Paramount and Lions Gate Entertainment (LGF).


Like Redbox, Netflix has also struggled to gain access to new releases. Its deal with Warner Bros. expanded streaming content and new-release availability, but extended the wait for new releases to 28 days after their sale date. This has been a sore spot for many Netflix customers, who have accused the company of making new releases harder to find on its Web site.


Mike Kaltschnee started the blog Hacking Netflix in 2003, in part to track new Netflix releases. He has spent seven years comparing Netflix's new arrivals to those at other retailers.


"Netflix's position is that people don't care about new releases anymore, which isn't true," he says. "There's been an increase in delays and Netflix has to balance out the equation."


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