Netflix's secret strength? Prime-time viewing

Heavy traffic and expanded episode content will take the edge off increased costs and falling earnings at the company.

By Jason Notte Nov 8, 2012 5:18PM

Image: Watching television (image100/Corbis)Netflix (NFLX) earnings are about as red as its envelopes, but its server-squeezing streaming traffic is still the bright-green envy of its industry.

Netflix commanded 33% of prime-time web viewing based on Internet traffic in September, according to Sandvine's "Global Internet Phenomena Report" released Wednesday. That's up from 32.7% a year ago and 20.6% in the second half of 2010. More importantly, it's more than 18 times the the share of Amazon (AMZN), Hulu and Time Warner's (TWX) HBO Go.

Despite revenue that declined 88% last quarter from a year ago and content costs that jumped from $3.5 billion to $5 billion over the same span, Netflix's streaming audience has made it a hotter commodity than newly streamed episodes of "The Walking Dead."

Billionaire activist investor Carl Icahn saw enough value in Netflix to buy up 10% of the company and recommend consolidating it into a bigger entity like Amazon or Apple (AAPL). Netflix adopted a "poison pill" anti-takeover share strategy as a result, vowing to flood the market with shares if any shareholder's stake exceeded 10%. Amazon, meanwhile, responded to the anti-buyout measure by tweaking its Amazon Prime pricing structure and taking more money from members just to compete with Netflix's streaming service.

Why the urgency from Netflix investors and competitors? The Sandvine found that U.S. households have more than doubled their monthly phone and cable Internet use in the past year. Respondents are watching 81 hours of streaming video a month, and Netflix takes up the biggest chunk of that time. Investors want Netflix while its dominance gives it value. Competitors are struggling to seize a larger portion of that viewing schedule.

Second-place Amazon, for example, accounted for only 1.75% of streaming-video viewing in September, despite prying away some of Netflix's content through a new deal with the Epix movie channel. Amazon is now testing a $7.99-a-month subscription plan for its Amazon Prime streaming video and free delivery service to compete directly with Netflix, which charges the same amount for its base streaming package. That's not great news for Amazon Prime members, whose annual membership fee will increase from $79 to $96 under the new deal.

Streaming competitor Hulu also charges $7.99 a month for its premium Hulu Plus service. Unlike both Netflix and Amazon, however, Hulu still loads up its content with commercial interruptions. As a result, the News Corporation (NWS), Comcast (CMSCA) and Disney (DIS) joint venture's share of the streaming market is only 1.38%, good enough for third place. HBO Go lags behind at 0.52% streaming share, but is only available to HBO cable subscribers and is more of a "TV Everywhere" cable throw-in for mobile device users than a true streaming service.

Though Netflix is still sorting out its finances, its streaming growth has been a huge strength amid its competitors' relative stagnancy. Netflix added 1.16 million streaming subscribers in the third quarter and bumped up its streaming revenue by $36 million. Its DVD subscription numbers continue to erode, but Netflix just passed the 30 million worldwide subscriber mark for its streaming service last month.

After a series of missteps that included separating DVD and streaming services, doubling its costs and letting key content agreements like its partnership with Starz slip, Netflix is finally strengthening its streaming by giving the customer what it wants: commercial-free TV. A survey released last month found that 73% of customers who stream video online do so to catch up on episodes and discover new shows.

"For serialized TV shows, however, we do offer an amazingly better experience, because our members can start right from the pilot episode of season one and watch multiple seasons at their own pace," Netflix told investors in its earning release last month. "Neither Redbox DVD nor the DVR truly offers this capability."

By extracting movies, adding more uninterrupted episodes, continuing to spread its streaming service across multiple devices and setting the template for streaming fees, Netflix has perfected its secret formula: a tonic of prime-time popularity that keeps other ills at bay.

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Nov 8, 2012 8:31PM
I REFUSE to pay for cable and have had Netflix as a main source of TV for the last couple of years atleast!  They can have my $8 bucks a month( we don't get DVD service) gladly as opposed to the monopolistic cable companies getting whatever ridiculous amount they charge. 
Nov 8, 2012 9:50PM
Netflix isn't nearly as good without Starz but I suppose it  is worth $8.00 a month.
Nov 8, 2012 7:07PM
Amazon does not even come close to the value of Netflix.
Nov 9, 2012 11:38AM
i wish that netfix would get some better movies for streaming
Nov 8, 2012 9:12PM
Netflix is the 800 lb elephant in the room.  They had a huge headstart.  The others are trying to tiptoe into the market.  You have to go big or go home.  Netflix gambled and it paid off.  
Nov 9, 2012 12:29AM
I am singled , still outgoing don't have a need for cable , can still watch broadcast tv when I find something interesting , watch netflix on my pc when I want to really still want to watch entertainment videos and even rent dvds and watch when I have time . I still hear people complained about their cable service that there is nothing good to watch . Me , I rarely have time to watch , but when I do Netflix is all I need and I still enjoy going to the movies to watch on a big screen on my off days . Too busy and netflix is the best affortabled service I still enjoy on my schedule
Nov 9, 2012 6:25AM

I would bet within 20 years Tops, All Video stores will be out of business(including redbox) and most cable will be the same price as online streaming. Just so they can try to keep up profits. The worse thing I see is online streaming will probably become more expensive because Greedy online businesses will become just like cable and want to charge an arm and a leg once more people switch to using it once they realize exactly how convienent it really is! The fact that this world is rapidly becoming more and more technological means that the world is going to change and everything from the TV we watch to the shopping we do will change! Those that change with it and first, will end up on top, those that dont will go out of business!! I personally have used online streaming for the past 4 years as my main source of tv, actually for my entertainment period! Its the most convienent, best of all has NO COMMERCIALS, you can truly find ANYTHING you want to watch and is still pretty cheap. Especially compared to Way over priced cable who charges an arm and a leg EVEN though they get paid by all those worthless commercials they show too!!

Nov 9, 2012 8:39AM
Love Netflix,but need to have cable or satellite for my sports.Otherwise I would dump these over priced charge you twice #$%&***s.Where I live you cant even watch your home town college football on local channels because the school is so greedy thry sell their viewing rights to the highest bidder,(pac 12 network) and even monday night foot ball is on the espn or nfl network.It sucks to be a sports fan anymore.We used to pay for cable so we wouldnt have to watch commercials, now we do both, how did that happen? Does any one know how I can get all my sports without cable or sat,please let me know.I would drop these scum bags like a rock.
Nov 9, 2012 1:09PM
I just purchased a HDTV Antennea from best buy,  I think its RCA brand. Its flat white and hangs on my wall.   For 30$, I get 30 channels most all come in clear.  HD 1080p through a antennea!!!   Comcast charges you extra to get HD!   So i get my Seahawks games in HD, my news and kid shows in the morning.  FOR FREE!
Coupled with netflix and you cant beat that!
Nov 9, 2012 6:08AM
I cut the cable a while ago and while Comcast chooses to nix me for not having cable TV service and charging me more for my internet. I am thinking this is a small price to pay for not paying for content I don't want. Same goes for satellite too. Netflix is by no means perfect and sometimes I wonder how it would not be going even better with people who could actually run the company better? But between having Netflix, a Hulu Plus account and Apple TV and over the air programming. I manage to save myself about $70 a month in costs and still provide plenty of content.
Nov 9, 2012 9:19AM
why don't they start showing some first rate movies (Avengers, Spiderman, etc) thenmaybe they will get some business
Nov 9, 2012 2:03PM
If Netflix would offer more recent releases, it MIGHT be worth investing in.  GAWD.
Nov 9, 2012 12:01PM

Redbox isn't going anywhere, small town America where internet is slow, or where people don't have the money to pay $50 a month for high speed the Redbox at the Dollar General has a longer line than an ATM at a flea market...

I for one will not pay a membership fee. There's just not that much worth watching on Netflix streaming. On demend like $2 for Walking Dead Ep on Amazon works for me way better when I have time.

Cable got greedy with their FAKE cheap reality shows like Storage Wars and Pawn Stars. Liberal news networks and replaying of 2 star movies. I took down the dish years back and enjoy the extra cash each month.

Nov 9, 2012 2:22PM
I think Netflix streaming needs to improve content. There are a lot  of good movies out there. Netflix streaming offers a lot of trash and flash but not a good, solid movie selection.
Nov 9, 2012 1:43PM
I found the perfect formula !!
Reduced my cable to "basic" getting only 20 channels espn/espn2 & local channels + CBS,ABC,PBS etc.
and receive most NFL games (very important) for a cost 0f $20.00 month.
Added Netflicks for $8.00 for a grand ttl of $28.00 month.
My Cable bill was $80 a month and with this new setup produces a savings of $52 a month.
"very please with saving money" ( as we all are)
Nov 9, 2012 1:11PM
compared to directv netflix is incredible value...until 5 of your favorite shows disappear overnight from your instant que...but there is still more there than you could ever watch...all commercial free making tv watching pleasant again....
Nov 9, 2012 10:43AM
What happened to Flipper ? I was about 30 episodes into it with my kids and all of a sudden it was gone ! It was horrible ! Please bring back Flipper Netflix !
Nov 9, 2012 3:14PM

I hope Nextflix management can keep the company alive.  There is no better value than their streaming service.

Glad they adopted the poison pill defense.

May all people who try to destroy Netflix get "poisoned".

Nov 9, 2012 3:51PM
i have both services. still i have to go to other sites to get current premium content.(i won't say which ones. lesson learned from Ninja video.) as for amazon prime membership?, the savings realized through online shopping with amazon prime makes up for the projected 96.00 per year membership fees. the big three still have a long way to go to bring online streaming into the mainstream. the lack of current premium content remains the big obstacle to the use of these services.  HBO is really dropping the ball not offering a similar format to provide online access to their catalog. especially for internet only subscribers like myself
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