Wednesday, April 22, 2009

The Coming War Between Netflix And Comcast (NFLX)

Dan Frommer|Apr. 22, 2009, 7:00 AM|comment16
Tags: Media, Cable, Telecom, Video, Netflix

NFLX Apr 22 2009, 09:37 AM EDT
45.85 Change % Change
-0.75 -1.61%
Someday, online streaming could be very important to Netflix's (NFLX) business. But that's not in the immediate future. And as the digital movie rental business develops, Netflix will likely compete more with cable companies like Comcast -- and less with online video upstarts like YouTube.

Netflix shares, which have been shooting through the roof since last November, closed down 6% Tuesday -- dropping as much as 9.7% -- while the Dow and Nasdaq closed up 2%. Why the sudden drop? In part because of a negative report Tuesday morning from a Wall Street analyst.

Lazard Capital's Barton Crockett launched coverage with a SELL rating and a $34 price target, according to a summary by Barron's. One reason: Crockett thinks Netflix's standing in the streaming movie market "will be meaningfully eroded in coming months" by YouTube and Hulu.

Crockett -- at least from the summary on Barron's -- seems to be warning investors about the wrong rivals. When digital delivery matters in a few years, instead of worrying about YouTube and Hulu, Netflix will need to worry more about cable companies like Comcast, Time Warner Cable, Verizon, and AT&T. Why? Because while Google's YouTube is a popular Web video site for goofy clips, and it's starting to make deals to put feature films on its site, it is not going to be a huge movie site any time soon. Why not?

First, because it does not have any compelling content on it. Have you seen the full-length movies and TV shows on YouTube? They are the kind of titles you'd buy for $3.99 at Walgreen's. And that's not likely to change soon. Movie studios don't get much money from Internet ads, and they still get a lot of money from DVDs, so they're not in a hurry to put anything great online for free.

And second, because people still want to watch feature films on their big, flat-panel TVs, not their laptops. YouTube and Hulu -- and, indeed, Netflix -- require people to buy a new gadget to watch movies on their TVs. That's one of a few important areas where cable has an edge.

* Cable companies already have digital set-top boxes in tens of millions of living rooms, where people want to watch movies.
* Cable companies own their own networks, fine-tuned for video -- while Netflix, YouTube, and Hulu ride over the public Internet, which cable companies control access to -- and want to make more expensive.
* And cable companies already have long-standing, lucrative deals with movie studios, which they can leverage to get the best content, availability dates, etc.

Anything's possible, so maybe YouTube will someday offer a $20 plastic thing that hooks into the back of your TV, connects to a free Google WiMax network, and can stream free, ad-supported, first-run movies to your TV set.

But the more likely future is that cable companies will dominate digital movie delivery, with companies like Netflix, Amazon, Apple, and Microsoft fighting for scraps, and YouTube and Hulu still mostly PC-based services.

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See Also:
Why People Hate Cable Companies (TWC)
Time For Cable Companies To Fix Their Awful User Interfaces
Pay TV Survives Housing Crash, Hulu's Rise
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Matt Fisher said:
Apr. 22, 7:47 AM
I agree that Youtube and Hulu don't provide sufficient competition due to limitations on movie content and the quality of the streamed video. Hulu is the notable exception when it comes to TV show content. It is important to note that cable companies have been offering movies to rent for many years through services like Comcast's On Demand and Netflix managed to still become a dominant movie provider in that same time. Cable companies would have to change their business model to subscription based system in order to really challenge Netflix's dominance as it comes down to how much value you get per dollar spent.

I have Comcast, so I can't answer for other cable providers, which charges a fairly hefty rental fee for each video on top of the monthly charge for the On Demand service. I'm paying for the priviledge to have the option to pay for a 24 hour rental on a new release. If I changed my viewing habits to On Demand, not only do they lack the library of Netflix, I would be spending $50 to $100 per month with Comcast versus my $15 per month for Netflix. Basically, Netflix is a bargain with no tiered pricing for newer releases and you get to keep it for longer than what Comcast offers.

The value proposition that Comcast offers is one of immediate gratification, but that gratification may be limited in it's appeal to only certain customers. Most people I know are happy to be spending $15 instead of $50 to $100 per month for their movie viewing habits.

Finally, in defense of the streaming services you don't have to buy any fancy equipment to hook up your laptop or PC to your flatscreen TV, just a simple monitor cord as most mid-range flat panel TVs offer PC input connections. It's not HD quality, but a cheap and effective way to easily stream Netflix, Hulu, Youtube or any other site directly to your flatscreen TV. I don't need the $100 box from Netflix, the AppleTV or any other pointless device to bring me free web-based streaming videos, which look good even using a simple monitor cord.

Cable companies only become a viable threat if they decide to get into a price war, which will probably not happen as the movie studios will be very reluctant to give up their profit margin they receive for the On Demand service. Right now On Demand videos are more of a luxury compared to Netflix's inexpensive subscription service.
D.S. said:
Apr. 22, 7:48 AM
My family made the jump off of comcast and onto pure internet television for the positive. Better content, but no streaming news channels.... yet.

The big issue is price. Comcast cost $189 a month which included internet. We already had the flat panel TV and occasionally watched itunes movies on it. So adding FIOS, a mac mini and a wireless keyboard and then subscribing to netflixs for $9/month to get access to the streaming films was a perfect set-up. Add in hulu, veoh, itunes, and other sites and we get more as compared to just comcast. The net is 1 years subscription cost for cable (not internet) will pay for the mac mini... after that it's $9 a month for content. Seemed like a good deal as compared to $100+ a month for comcast.

I think the author is forgetting cost. Comcast is a good service, but unless you are hooked on live TV channels.... you can get all you need for free.....

Nathan S. said:
Apr. 22, 7:59 AM
I am actually pretty impressed with Netflix. I think that they have made a large step forward after they introduced streaming movies through the Xbox 360. This allows subscribers to access instant movies that are displayed on a TV of their choice. This choice was incredibly smart, because it taps in to the millions of people who already own 360s and will have virtually no hardware fee. I think if Netfilx can expand on this kind of service with other gaming consels, they will be greatly successful.
Dan Frommer (URL) said:
Apr. 22, 8:03 AM
Interesting points so far. Price is definitely an issue.

And I forgot that every time I write about this, tech-savvy people jump on me about hooking up your laptop to the TV with a monitor cord. Unless I'm crazy, I can't imagine the majority of people doing that.
David said:
Apr. 22, 8:03 AM
I will never go to comcast. Here is Cape Coral, FL, they have the worst service and when you need their help, they take forever to come to your house. Netflix, i like because it's simple and if i get a wrong DVD, they send the right one out, no questions ask. I prefer DirectTV. Better custmer service and fast response to any problems i have yet to see.
waldo said:
Apr. 22, 8:20 AM
I've got Charter. Suck on that Comcast!
Ray R said:
Apr. 22, 8:25 AM
I am not sure why you can't picture more people hooking a monitor cord from a laptop or PC to their TV. I know many who have done this. Remember it isn't just to watch online movies but to play games surf from your living room, show all those digital pictures to relatives, and much more. It is the new migration of digital content from your home PC to the family/living room. Yes to your point many adults may not have the tech savvy to do this but a large percentage of middle schoolers are perfectly capable of doing it or figuring it out .
I recently ditched my HBO, CINEMAX,SHOWTIME subscription in favor of Netflix. It has reduced my expense of movie watching considerably is only a small effort to use.
jammydevil said:
Apr. 22, 8:32 AM
Lazard Capital's Barton Crockett - Clueless!

Comcasts OnDemand is terrible. You have to PAY EXTRA for any good movies and the free ones are a joke.

I pay Netflix 14bucks a month I get my DVDs when I like and they have a great (and growing selection) of streamable content NOW.

A $99 box to connect netflix to my TV and I get all the content I need.
Don K said:
Apr. 22, 8:34 AM
Nobody mentioned RedBox ....

Dan Frommer (URL) said:
Apr. 22, 8:42 AM
Comcast will likely have to adjust its on-demand pricing and add a lot more free stuff.

Don K: Talking about streaming here, not kiosks.
gene said:
Apr. 22, 8:51 AM
Dan F like Henry B don't know what they are talking about. I look periodically at Silicon Alley Insider and it is amazing how much they are wrong. They seem to think that the more they say the better they look.

I have cable and netflix. Cable is too greedy to ever compete.
Bob H said:
Apr. 22, 9:01 AM
Everyone here has it wrong. The competition is not based upon content but BANDWIDTH! Broadband companies are working hard to end net neutrality and institute caps and packet inspection. Time Warner almost got away with a horrendous 40 GB/month, but they just said, "not yet." I was on Comcast until they started to implement their 250 GB cap, which currently could do maybe 100 movies at best per month on netflix (which is acceptable, but not fantastic considering the average family watches 4 hours a day of TV). But those are based upon LOW RES movies. In a few years, offering 1080p streaming will be expected. Do you actually think Comcast is going to cannibalize its own on demand by offering higher bandwidth caps? The other thing they have been doing is throttling traffic based upon the content. So my surfing experience was fast, but as soon as I started a netflix movie, I found myself getting 50 KB/s. That is not fast enough and I would turn off the movies. Comcast has a lot invested in their expensive to maintain on demand service. The general trend is toward the Internet for everything from phone, to data, to entertainment. American broadband companies desperately don't want this because at current internet prices vs other services they sell, they would lose big. That is why they are instituting caps and throttling. So when the consumers ultimately demand better service, it will be offered, but at a much higher price, such as $120 / month. But we won't blink an eye because we will justify it by cancelling our cable and telephone bills and everything will come out in a wash. DON'T BE FOOLED, THIS BATTLE IS NOT OVER CONTENT, BUT OVER BANDWIDTH! THOSE THAT CONTROL IT INTEND TO MAKE THEIR COMPETITION IRRELEVANT WITH CHOKED OFF BANDWIDTH!
Peter Nush said:
Apr. 22, 9:19 AM
Dan, regarding your follow-up comment: "And I forgot that every time I write about this, tech-savvy people jump on me about hooking up your laptop to the TV with a monitor cord. Unless I'm crazy, I can't imagine the majority of people doing that."

Something to keep in mind is the growing integration of Internet video viewing into HDTV's (i.e., Sony's BRAVIA, Samsung's 46B750, LG's 47LH50, etc.). This eliminates the need for consumers to hook up their PC to their HDTV, no matter how simple it becomes, and makes the barrier to adoption substantially lower/easier for the general consumer.

What impact does this integration trend have on your assessment of cable companies position in the market?

Krishna Boppana said:
Apr. 22, 9:20 AM
We are big fans of watching movies on demand. I got Roku for about 4 weeks now, got to tell you it is the best so far in the market for on demand movies. I was a Comcast subscriber and now Fios. Both of these providers charge hefty fee for movies on demand, only thing they eliminate is a trip to Blockbuster or waiting for movies to show up in the mail. Netflix On demand service is HD quality where available depending on movie and the Network speed. Best of all it is included in monthly subscription fee. With new Blue Ray DVD players capable of Networking (Samsung, LG), it is not going to be too long before you don't even have to buy $100 box for Netflix streaming. Also, Amazon Video On Demand is available if you have Roku, personally I won't pay $5 every time I watch an old movie. With providers fighting over winning the streaming set top boxes, technology, it is best to stay with a neutral box like Roku.
Jeff said:
Apr. 22, 9:26 AM
Dan, do you have Comcast? Do you understand how terrible that company is? I for one am waiting for U-Verse to improve here in MI and then it is so long and good ridence to Comcast. Their pricing is ridiculous, their service is horrendous, and their customer service makes me want to commit a crime.

How can you write an article and not consider cost as a factor? I will reiterate the rest of the commentors; Comcast rips you off for On-Demand rentals and will jack the price up once more people start to use the service (Economics is apparently not their strong suit). Not to mention their ridiculous pricing for "extras" along with their already bloated pricing i.e. Cable Modem rental, DVR service (the Motorola box is the biggest piece of junk on the planet), HD programing, Internet download limits, etc.

I for one have Netflix and Comcast. I love Netflix, and use their Mail and Streaming service reguarly. For $18.01 a month (including tax) for unlimited streaming, and 3 Discs at a time it's a bargin compared to getting HBO, Cinemax, or another Movie channel with Comcast. Note that I would be subjected to whatever titles those channels dictate, rather than my own selection.

As for your arguements about connecting to Netflix, Hulu (which I also use), etc you have forgotten about the latest technological releases. Several of the recently released Blu-ray players are now Netflix/streaming media ready. All they require are an Ethernet connection or wireless network. Also, as another commentor stated, the Xbox 360 and the most likely the new Wii have these connections built in as well. Most, if not all, of cable households have a gaming system or DVD player. Once these households decide to upgrade their technology (as was done with VHS to DVD and Playstation to Wii) they will have this new outlet for their media input buil-in.

In the end I do not care who wins the media delivery war, as long as Comcast losses. One can tell they there is a shift coming to the cable business e.g. the rise of Netflix, Hulu, U-Verse, and FiOS. I just hope they learn their ways, repent, and stop raping their customers with ever rising costs. I suggest that you do more research on your next articles, since you it is obvious you did 0 for this one.
Ed Fardos (URL) said:
Apr. 22, 9:43 AM
Netflix is fine. Comcast can't deliver basic television services, let alone network, video-on-demand, etc. I wonder if the analyst subscribes to a comcast service? Even with regional monopolies, comcast is a failure.

Maybe we'll be stimulated into FiOS everywhere!

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