Netflix Takes the Long, Smart View on Video
With the introduction of its DVD by mail business, Netflix (NFLX) disrupted the video rental industry and established itself as an innovator. But in a newly released internal presentation, Netflix lays out a smart plan to retreat from the business that made its name and carve out a niche position for the long term competition against heavyweights like Google (GOOG) and Time Warner (TWX).
As the presentation shows, the DVD by mail segment of Netflix's business continues to grow (slide 3). But the company is going to largely abandon this approach, shifting its resources away from physical mailing towards what it sees as the true future, streaming.
Netflix is right about the direction video is taking, and it's also correct that a lot of big firms, including some of the very same studios it wants to partner with on content, are going to move aggressively into streaming. That's why Netflix is wise to begin diverting the majority of its resources to streaming right now, even if its mail business is still profitable. The biggest threat to Netflix is the expansion of online subscription offerings like TV Anywhere and Hulu. These could be direct competitors to Netflix for customers, or a drain on the programming Netflix is able to offer if the studios choose to keep their content for themselves. The company is also worried about growing availability of ad supported content through platforms like Google TV.
Netflix strategy seems to be a tactical retreat, pulling back from new releases and choosing not to diversify its content to areas like sports. The company wants to avoid getting sucked into direct competition with studios, theaters and PPV, where it might end up paying premium prices for current content.
Instead, Netflix is taking the archival approach, building its back catalog of films and prior seasons of television. The company hopes that within a decade it will be the single largest licensors of film and TV. Combine that catalog with the company's extremely popular recommendation engine, which has been ranked number 1 six years running by Forsee, and Netflix can offer a cheap, powerful alternative to others in the streaming field.
Another key is for Netflix to become a presence on the wide range of devices that will allow consumers to stream video: everything from Blu-ray to TV to tablets to phones. And again, that's why Netlifx decision to divert resources to streaming now is smart. The company needs to invest heavily in partnerships with device makers that will give it the kind of ubiquity it needs to challenge a Google or Time Warner, who haven't really gotten their streaming programs off the ground yet.
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