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25 Jan 2008, 4:04PM PT
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Compare Netflix's Online Video Model To Apple's Video Business Model by Devin Moore
Sunday, January 27th, 2008 @ 5:47AM
Apple and Netflix offer different services, but there is the possibility that Apple's service would "cross over" this year and take over from where Netflix is positioned as the leader in online video rental.
Netflix has the upper hand right now because of the extreme popularity of DVD players. There's simply a large group of people with a DVD player plus some kind of internet access that can use the Netflix service, who would not be able to use the Apple service. Netflix will likely continue to grow in popularity as brick-and-mortar stores go away due to their lack of selection. In particular, Blockbuster no longer carries any older movies, and Hollywood video still requires you to drive there, drive back, etc. I have family that lives in remote places, as many Americans do, and they would not be able to rent hardly any videos, were it not for the Netflix service. So I'd expect Netflix to crush Blockbuster this year, and/or Hollywood video in the near future to become almost a monopoly in the physical DVD rental business.
At the minimum, with Apple you're either watching on your computer, or you have an apple TV box and wifi/high speed internet in your house to make their service useful. Apple will continue to make gains with rentals to adopters of these plus some iPod video/nano users, however their service will remain second to Netflix barring some pretty remarkable adoptions of other Apple and higher-dollar technologies like wifi or high-speed internet access.
It is possible that Apple could provide more serious competition to Netflix: should Apple release a cable for watching movies rented from an iPod to a regular TV, then every iPod would become a viable alternative to a DVD player. There are numerous families with iPods that could take advantage of Apple's movie rentals at that point. Short of such a cable, though, I just don't see Apple's rentals overtaking nearly the marketshare of Netflix.
Compare Netflix's Online Video Model To Apple's Video Business Model by Timothy Lee
Monday, January 28th, 2008 @ 9:52AM
I would expect both services to grow slowly over the next year, and for them to be eclipsed by more creative businesses over the next five years if they don't make some major changes.
The fundamental problems are twofold. First, I think that rented and purchased online content is likely to be eclipsed by free, ad-supported content. And second, I think the use of intrusive digital rights management systems will limit the growth of the online video market and leave an opening for more open technologies to fill the gap.
First, on rentals versus ad-supported content: renting made a lot of sense when content came on a physical tape or DVD that had to be picked up at the store, viewed, and returned. Those DVDs cost money and they took up space in peoples' homes, so it made sense for people to share them. But online content comes in as pure 1s and 0s. It costs next to nothing to make a copy. And so it's silly to place the same kinds of restrictions on it that are placed on traditional physical media.
This problem is greatly exacerbated by the studios' insistence on using draconian, proprietary copy-protection schemes. These schemes dramatically limit the growth of video-rental platforms, because only authorized vendors are allowed to build compatible products and services. It also deliberately introduces incompatibilities among hardware devices that would otherwise be perfectly able to talk to one another. See, for example, Netflix's troubles with DRM on Vista.
These trends have become obvious in the music space. Last year, Steve Jobs announced that he wanted to do away with music DRM on iTunes, and since then almost all of the labels have taken the plunge toward DRM-free music sales. Late last year, the labels took the even more dramatic step of legalizing music-sharing in exchange for a cut of ad revenues. Today, you can listen to almost any song ever recorded, for free, with the blessing of the record labels. They've done this because they've discovered that selling or renting content doesn't work—there's so much free content on the Internet (legal and otherwise) that a lot of users just aren't interested in pulling out their credit cards and paying for content.
We've seen the same trend in the news space. The New York Times and the Atlantic both recently dropped their paywalls and made their content freely available, supported by advertising. The Los Angeles Times dropped their paywall in 2005, and a lot of smaller newspapers have made similar moves. The Wall Street Journal has become one of the few newspapers still clinging to a paid content business model, and there's a lot of discussion that Rupert Murdoch is thinking about dropping the paywall there as well.
To anticipate an obvious objection, the iTunes Music Store rode almost entirely on the coattails of the iPod. Apple has sold fewer than 50 tracks—i.e. about 4 CDs—per iPod, suggesting that the vast majority of the music on the iPod is from other sources. The lesson of Apple's dominance of the music purchase market, I think, isn't that iTunes was a roaring success but that their competitors were such dismal failures that Apple won the market by default. Digital download sales have come nowhere close to replacing lost revenues from CDs, and I wouldn't expect that to change. To the contrary, I think we'll start to see iTunes become eclipsed by free, ad-supported music sites like Imeem or others that are just being started now.
With all that said, I would expect Netflix to do better than Apple over the next year or two. Netflix has a large installed base of customers who are already happy with their DVD-swapping service. Adding digital downloads probably won't attract a ton of new users, but it will provide a bit of added value for existing customers. Some customers may even decide they like it better—at least for those customers who aren't tripped up over DRM issues. Moreover, subscription models make more sense than outright purchase or rental, because there's no reason to limit the number of movies that a paying customer is allowed to watch. So if I had to put money on one strategy or the other, I would bet on Netflix.
On the other hand, Steve Jobs is a marketing genius, and he may yet unveil new hardware devices that change the game. Apple TV has yet to catch the public imagination, but Apple is working hard to improve it, and it may yet take off. Moreover, Steve Jobs may be pushing hard behind the scenes, as he did with music, to liberalize the licensing terms for movies. If he convinces Hollywood to license their movies on more liberal terms before Netflix or others do, that could be a big hit.
But my guess is that someone else will come along and blow both of them away. The really ironic thing about the video market is that Hollywood already has a winning business model staring it in the face: television. They've been giving away content and selling ads for 50 years. There's absolutely no reason they couldn't adopt the same strategy online: provide free, DRM-free, ad-supported access to their content. If they did it well, they wouldn't have to worry about "piracy" because piracy would just be increasing interest in their shows. I think that sooner or later, someone will figure out how to do this right (perhaps with non-Hollywood content if Hollywood is too intransigent) and make bundle of money. At which point Hollywood will reverse itself, as the record labels did last year, and become believers in free, ad-supported content. Unless Apple or Netflix position themselves to get out in front of that parade, they're in danger of getting left behind.
Michael Long Wed Jan 30 11:05pm |
If the popularity of pure cable channels and the relative success of paid TV downloads from iTunes has shown anything, its that there's a large number of people out there who will pay for convenience and in order to avoid advertising. Witness Tivo's commercial-skipping button, or the frequent download and usage of internet ad-blocking programs for web browsers. "Free" isn't the only solution, and advertising-based models aren't the end-all and be-all of content delivery. Convenience has value. And people will pay for it. |
Timothy Lee Thu Jan 31 5:10am |
My reading of the situation is that paid iTunes video downloads are still a totally insignificant fraction of peoples' home entertainment activities. Apple doesn't appear to have released updated figures recently, but total iTunes video downloads appear to be in the low hundreds of millions, which is just a tiny fraction of the tens of billions of person-hours spent watching television. Or to put it a different way, a *few* consumers will pay for convenience if the free alternatives are limited. However, the vast majority of people will simply watch what's available for free. Moreover, as more and more stuff starts to be given away for free, the market for paid content will slowly dry up because the free stuff will be ever more plentiful and convenient. There will be a paid download market for the foreseeable future, but it'll be a niche product overshadowed by a much larger ad-supported video market. |
Compare Netflix's Online Video Model To Apple's Video Business Model by Cody Jackson
Tuesday, January 29th, 2008 @ 11:32AM
Until broadband penetration and download speeds increase, movie downloads will still be a niche market, especially HD movies. Even downloading a standard definition movie can take several days if the download speed isn't more than 100Kbps. People may be paying for multi-megabit connections but the true download speed is rarely close to that. However, this doesn't mean that online movies should compromise on quality. The old version of Apple TV had bad picture quality, displaying compression artifacts and jagged images. Even though HD is the wave of the future, people won't accept anything that is less than standard DVD quality.
Online movie libraries are nowhere near the size of what conventional DVD libaries are. Just comparing Netflix's DVD selection vs. its online selection shows quite a disparity between what's available. Online movies have the potential to offer pretty much every movie ever created but movie companies are hesitant to do that. So right now it's simply easier to find what you want on DVD than try to find it online, especially if it's not a popular title like many documentaries or foreign films.
People are used to the convienience of DVDs. They don't want additional DRM restricting where they can watch movies. A DVD can be used pretty much anywhere; many online movies are restricted to just the computer they are downloaded to. In the case of Apple, the movies are restricted to an Apple TV device. Though people may use the online services, they will still find a way to circumvent DRM so they can get "fair use" from them. Hence, it's better for companies to consider what people actually want rather than try to artifically restrict them.
Similarly, movies need to be accessible to multiple devices. Currently Netflix only offers online movies for Windows users, which effectively eliminates 5-10% of computer users, such as Mac and Linux. This is a bad idea; there is no reason why online movies can't be accessed by pretty much any Internet-aware and video capable device.
One way to really encourage online movies is to allow people to make a DVD copy. DVDs are so universal in people's homes that it will be several decades until stricly online offerings take over. It also means that people can download a movie and take it with them so they aren't tied to a computer or Apple TV. It also means that they can show the movie to friends and family, which means more people may become interested through word-of-mouth.
Apple TV is an interesting idea but it harks of previous set-top box offerings. Even though the Apple TV provides other resources besides just movies, there are other ways for people to accomplish this. Therefore the most important reason to buy one is to rent online movies. But why buy a set-top box to watch movies when you can just as easily rent a DVD and use any DVD player to view them? Set-top boxes are a bad idea for commodity products; it smacks of artifical limitations for consumers. When someone can buy a small-form factor computer and use it to download movies from Bittorrent or play DVDs, why be limited by what Apple wants to include in Apple TV?
In summary, I don't think online movies will move much past the "interesting" stage until they are available on multiple platforms and don't lock people into certain devices. Internet download speeds also need to increase so people don't have to wait more than an hour or two, or at least so streaming doesn't stutter. Streaming movies need to allow people to treat the material just like a DVD rental; if people are watching at home, then real life can intrude at any time. It also makes sense to create a system that lets people use the movies on their home theater system rather than restricting them to a computer, therefore one idea is allow burning of DVDs. Finally, the available online libraries need to be at least as good as what's available on DVD; companies are only restricted by storage space, not physical space, so they can offer nearly every movie in existence which means more potential profit from the "long tail".
Cody Jackson Tue Jan 29 2:38pm |
Here's a MacWorld editor's take on Apple TV; pretty much reflects my ideas about it, though more so since he's actually used it. http://www.macworld.com/article/131854/2008/01/appletvdreams.html |
Michael Long Wed Jan 30 11:11pm |
Personally, I think DVD ownership is overrated. Other than a few copies of Cars or Ratatouille that the kids will watch 500 times in a single week, how much content is worth owning? If you could truly watch any movie you wanted from the universe of movies out there, on demand, for a few bucks, why would you want to cart around and store a pile of discs? |
Cody Jackson Thu Jan 31 9:07am |
Well, good for you. Many people like to have a physical object to show for their purchase. Why do you think so many people still buy CDs? They like the liner notes and the feel of a physical object (at least the many comments I've read state that). Until any mobile device can access any online movie at any time, DVDs will still have their place. And with the number of DVDs and DVD players (including portable units) on the market, it will take several decades before they go away. Not to mention that broadband speeds are horrible for downloading movies. Even Bittorrent, which is supposed to be faster than a straight direct-from-server download, still takes days/weeks to get a movie. Why bother to do that when I can just go pick up a movie for $5 at Walmart? Even if I don't watch it that often, it's still a better deal. |
Michael Long Thu Jan 31 12:29pm |
A typical iTunes movie download on my current DSL connection takes two or three hours, or about 96% better than the normal 3 day turnaround I get with NetFlix DVDs. (You probably need to find better torrent seeds.) And with the 30-days-to-watch starter period, there's nothing stopping you from queuing up a couple of movies in advance to be downloaded overnight. After all, it's no more work than maintaining a NetFlix queue. Further, I know of quite a few people who used the iTunes "season pass" feature to kick their $100/month cable bills, buying a new show each month for $30 each. Add ala-carte rentals, and why have HBO? Apple also maintains (though its yet to be seen) that you can begin watching a rental "after a few of minutes" while it continues to stream. Will it "stutter"? At this point who knows? Apple has yet to release it into the wild. Finally, broadband is already improving. This summer Qwest promises to take my DSL from 1.5mps to 15 mps... at the same price. Don't assume the status quo will always remain as is. |
Michael Long Thu Jan 31 12:39pm |
"When someone can buy a small-form factor computer and use it to download movies from Bittorrent or play DVDs, why be limited by what Apple wants to include in Apple TV?" And how much will it cost to buy a "small-form factor computer" for every TV in the average house? Can you buy a working, functional "small-form factor computer" complete and ready to "plug-and-play" with software, 802.11n WiFi, HDMI output, and a remote control for $229? Is everyone going to want a beige-box computer sitting in their living room next to their $3,000 plasma screen? Not to mention that downloading most movies from Bittorrent is illegal, and ISPs are already blocking/throttling such services. |
Cody Jackson Thu Jan 31 5:47pm |
I keep forgetting that, since I currently live in Hawaii, I'm not living in the real world. My broadband speed is horrible; even downloading a Linux DVD ISO image can take me several days. I'm sure back on the mainland things are moving much faster. But still, online movies don't have the same catalog available on DVD. Until that happens, online is really only a niche market, IMO. Regarding SFF computers, why would you have to buy one for each TV? You can stream the video to any of them. You can install MythTV or one of the turn-key DVR discs and have an instant movie/TV watching system. A coworker created a MythTV computer for his house using a turn-key disc and has had not problems with it. Plus, he's not limited to what a single company wants to sell him nor does he contend w/ DRM. Is it the right solution for everyone? No, of course. But neither is Apple TV. Sure, I might get one when I buy a new TV in a few years but I can't see it as a valuable item right now. You certainly can't take it in the car with you or on a plane. |
Michael Long Thu Jan 31 8:31pm |
"But still, online movies don't have the same catalog available on DVD. Until that happens, online is really only a niche market, IMO." Totally agree, and as I stated in my Insight, the speed with which the two services can ramp up content production is what's going to separate one from the other, and from all of the other competing products out there. An iTunes with a couple of hundred movies is nothing. An iTunes with 10,000-20,000 movies, TV shows, and documentaries, all on-demand, is going to be something else entirely. |
Compare Netflix's Online Video Model To Apple's Video Business Model by Michael Long
Wednesday, January 30th, 2008 @ 10:54PM
Existing attempts to provide downloadable "on-demand" services have foundered in the marketplace, suffering from high prices, overly excessive DRM systems, lack of content, and in general, lack of convenience. Further, most consumers already have access to some form of on-demand service via their existing digital cable/satellite set-top-boxes (STB), making it a three-legged race between competitive offerings.
Or four, if you consider the "pressure" placed on buyers to upgrade to Blu-Ray/HD DVD, or five, if we also toss streaming services like NBC Universal's Hulu into the mix.
So with eveyone attempting to grab market share and with existing competive services already in place, how will relative newcomers like Apple and NetFlix fare? What's their competitive advantage?
First, one has to consider one of the key factors that's hampered Apple's prior foray into this space: content. With only Paramount, Disney, and a few independents to rely on, the iTunes store (and as such, Apple TV), suffered from a paltry selection of films and videos. And consumers responded as such. NetFlix, on the other hand, has realized much of its success by maintaining a library of tens of thousands of titles, a true "long-tail" success story. This despite the fact the by-and-large the process is a pain, requiring days to recieve new disks and to turn them around again.
Obviously, content is key. And both Apple and NetFlix have realized this, signing deals with all of the major studios. Granting users access to thousands of titles will be instrumental in weaning them off their cable on-demand services, with a mere hundred or so available choices. This is so important that "first-mover" advantage may fall to the one that rolls out the most content in the least amount of time, and in all likelyhood lead Jobs to announce that "over a thousand titles will be available when the rental section launches." NetFlix, however, seems to already be in the lead in this regard with over 6,000 movie and TV titles available. Time will tell.
But that leads to another prime set of factors: convenience and comfort. It's pretty easy to sit on the couch and press the "on-demand" button. How much additional work is involved in a digital on-demand service? Here, it would seem that Apple is in front with an existing STB product in the marketplace, the Apple TV. This while NetFlix currently requires its users to curl up on their desks in front of their PCs to watch a movie. (Also a major disadvantage of most streaming services.) Forthcoming upgrades to Apple TV will also let consumers browse titles and rent them right from their televisions. NetFlix is said to be working on their own STB solution with LG, but no timeline has been announced. Delay too long, and they may let Apple increase their already considerable lead.
Download speeds will also be issues in terms of acceptance, but that will be true of both services. And in any case, a couple of hours, at worse, is still better than a three-day DVD turnaround.
Price will also be a factor, but both Apple and NetFlix seem to be competitive in that regard, and so we have the iTunes rental ala-carte model vs. the NetFlix subscription-based service. Ultimately, this may simply come down to consumer taste, and what works best for them. And both have subscriber bases (iTunes/NetFlix) to which they can turn in order to promote their products.
But Apple has two significant advantages up its sleeve. The first is its retail presence, in which potential buyers can see Apple's solution, touch it, play with it, and ask questions and get answers.
The second advantage, and equally significant, lies in the form of its massive army of iPod and iPhone and MacBook owners. All video-ready devices ready to provide their owners with on-the-go entertainment when they're on the road, or in a plane or train, and not just at home sitting on the sofa. And, due to Apple's DRM licensing policies, its an army that NetFlix is simply barred from entertaining.
If you've already ventured into the Apple universe, that's going to be a strong inducement to simply take the next step and, as some detractors put it, "drink more of the Kool-Aid."
Michael Long Thu Jan 31 12:41am |
Errata: The first is its retail presence, in which potential BUYERS can see Apple's solution, touch it, play with it, ask questions and get answers. |
Compare Netflix's Online Video Model To Apple's Video Business Model by Joseph Hunkins
Friday, February 1st, 2008 @ 10:49PM
As consumers slowly warm to the idea of downloading videos on their broadband connections key questions for both Apple and Netflix are how much consumers will use their services instead of video stores, DVDs by mail, or Cable offerings.
Unfortunately for both Netflix and Apple they face an uphill battle on several fronts:
Video stores offer many titles, generally at lower cost than downloads, and offer a simple casual shopping experience. Habits die hard and it's unlikely many consumers will switch exclusively to online downloads anytime soon.
Given the current state of download technology and infrastructure, there is a large natural competitive advantage for Cable and Satellite Companies who are already wired into millions of customer TVs and integrated into their monthly billing habits. Charter, Comcast, and others already offer on demand pay per view programming, and are in an excellent position to undercut Apple and Netflix pricing to their own competitive advantage.
Also giving the edge to Cable and Satellite is the fact that TIVO / MOXI / Media Center units are making it increasingly simple to program movie downloads from cable movie networks, special networks, and network TV, reducing the potential total demand for paid video offerings.
Netflix has been successful with the DVD by mail system, which will likely remain quite viable for some time as broadband and customer habits transition, however Apple loses on that front as well and appears unlikely to get into that market anytime soon.
Apple Video mini SWOT:
Apple has several potential strengths in the downloadable video market. First, their movies will be IPOD compatible. With some 150 million IPODS this could be an advantage as users warm to the small format for movies. Apple has cut pricing and renegotiated with studios to offer films at costs comparable to DVD rentals. Apple's brand is strong, and enthusiasts may fork over the $200+ for Apple TV adapter units and use Apple as their service out of brand loyalty.
Weaknesses for Apple trump the strengths in my view. Apple is competing with very established players in the form of Cable Companies, many of which already have set top boxes in the home as well as XBOX360 units and Media Center computers which can also manage content. Will consumers spend another $200 for an Apple set top box so they can watch movies for pay instead of free cable service movies they've TIVO'd? Some will, most won't. The limited number of downloadable film titles appears to be another defect in Apple's strategy. Also, where Netflix now offers unlimited downloads Apple forces payment for each title, which then must be viewed within 24 hours of starting the title.
Opportunities for Apple appear to lie largely in the iPOD/iPhone markets over which Apple has substantial control. For me personally, movies on an iPOD are not a pleasant idea but clearly for many in the youth market this may be a viable approach, encouraging downloads where users can watch on the computer, IPOD, or TV or any combination. As always, Apple's legendary marketing allows Apple to trump substance with style, so they may be able to push demand via advertising and appeals to their loyal following. In my view Apple should match Netflix "all you can eat" ASAP although from Job's comments about his battles with studios regarding lowering prices this does not seem to be a way to make them very happy.
Threats for Apple are overwhelming in this market. Several are mentioned above already including Cable Companies and the potential lack of user interest in downloading videos. A very direct threat in my view is the likely lower cost of the Netflix / LG set top box. It's hard to imagine even enthusiastic downloading consumers choosing Apple over Netflix if the latter offers cheaper hardware and cheaper movies.
Netflix Video mini SWOT
Netflix has several significant strong suits going into this market. First, they have established a loyal customer base who count on them for movies already and thus are likely to use them as they transition/experiment with downloadable movies. Netflix decision to go "all you can eat" is a powerful way to leverage the low costs and highly scalable systems to good advantage. If Apple does not follow this lead Netflix could emerge as the clear winner very fast, and once customers have subscribed and learned the Netflix routines it's unlikely they'll switch over to Apple even if Apple offers the same services. Price is a Netflix strength - they offer unlimited downloading for the price of a few store DVDs or a few Apple downloads. Library size is also impressive with Netflix which has made about 6000 titles downloadable to date. Netflix is generally considered to have outplayed languishing Blockbuster on several fronts, and wisely has no plans to open brick and mortar stores. Look for Blockbuster customers to switch to Netflix.
Weaknesses for Netflix are as noted above and primarily come from cable companies that offer similar services and are already in the home. In my view Apple and Blockbuster offer little threat to Netflix's dominance in this market.
Opportunities for Netflix. Continuing to poach Blockbuster subscribers and innovate as they have done for several years.
Threats: Slowing subscriber growth and market saturation. Seeking Alpha notes that growth in subscribers and revenue has slowed over the past year, though it's still expected to grow about 16% in 2008. Netflix should avoid aggressive moves that could threaten their profitability at a time where they are winning so many battles for online video dominance.
Apple vs Netflix Online Offerings:
Predicting the rate of the growth of *online video downloading* by these two services in the coming year is very problematic for obvious reasons. Clearly the *rate of growth* could be high because the current use is low.
I'd suggest that even though the rate of increase in downloading will be up for 2008 (due to insignificant current levels), the Apple set top box product will have very limited success and low adoption levels in 2008. In the recent conference call Apple suggested that iTunes was run at about "break even" to facilitate sales of hardware. Without a major push in advertising and sales focus (and perhaps even with that), it seems unlikely set top box and video download revenues will be impressive. I can't even imagine how a salesperson is going to push even savvy customers to buy yet another set top box so they can turn around and pay another media company for content. Look for more of the same from Apple TV despite the improvements to the service - slow adoption and low/no revenues.
I'd suggest Netflix has more potential for success both with PC downloading and the set top box for TV viewing. It seems likely Netflix will see a substantial increase in the number of subscribers who test out the download services since these are bundled with the DVD by mail and offer all you can eat appeal. Whether the set top box is a success may depend in large part on the cost of the LG units. At $200+ I doubt they will be enthusiastically received, especially as the US recession puts a crimp in this type of retail spending. Despite the growth in online video usage by Netflix subscribers, I do not think the increased growth in download services will have much if any affect on Netflix revenue bottom line given their all you can download format. Expect modest subscriber growth of 15-20% as the market slowly expands for Netflix services. The huge "silent majority" of customers who are not enthusiastic about the online download advantages will trump the early adopters, many of whom are already participating in this market.
Relevant links and sources:
Switch reports that Netflix "Instant Watch" saw 450,000 users in November 2007. http://www.switched.com/2007/12/04/netflix-seeing-four-times-as-much-traffic-as- blockbuster/
Netflix vs Apple:
http://www.switched.com/2008/01/15/netflix-pre-empts-apple-with-unlimite d-movie-downloads/
Movie Download Market:
http://electronrun.wordpress.com/2008/01/04/netflix-and-lg-to-enter-cro wded-movie-download-market/
Apple vs. Netflix:
http://www.techconsumer.com/2008/01/15/apple-tv-20-vs-netflix-unlimite d-this-will-be-interesting/
Apple vs. Netflix:
http://www.associatedcontent.com/article/553721/itunes_vs_netflix_vs_b lockbuster.html
http://www.swordplay.tv/2008/01/15/netflixbaby-steps-unlimited-instant-vie wing/
http://www.usatoday.com/tech/products/2008-01-15-apple-movie-downloads_N.h tm
http://seekingalpha.com/article/61865-netflix-2008-outlook?source=yahoo
Michael Long Sat Feb 9 11:08am |
You mentioned that Apple's offerings may be suitable for "many in the youth market", but I'm 51 and own an iPhone. Quite a few of my peers do as well, and one is considering upgrading to the new 16GB so she has more room for movies and shows. Movies on an iPod my not be a pleasant idea, but it sure beats the alternatives if you're stuck in a airport, traveling, on the train during your daily commute, and so on. Also, while NetFlix currently offers an all-you-can-eat option, I see this as more of an inducement to gain early customers as opposed to a long-term strategy. Or, like some DSL services, "unlimited" as long as you don't go over the "average". Can I do 30 movies a month? 60? Plus TV shows? At what point then does an "unlimited" package cost $100 a month, like a normal cable bill. BTW, Apple also has "PC" downloading via iTunes for Windows. |
Joseph Hunkins Sat Feb 9 1:55pm |
isights thanks for the interesting comments. I have not looked at Apple demographics but I think you and associates are an exception to the normal Apple market which targets younger than you. However if they are successful with young and old this analysis will likely prove wrong and they'll do just fine with the video offerings. I do NOT agree that Netflix will reverse itself on all you can eat - that seems very unlikely. I suppose they could be sneaky and throttle the download speeds such that nobody would ever do more than a few movies a day, but I think they are *correctly* assuming, as does a food buffet, that almost all users will use modestly and they can afford to lose money on a few heavy downloaders in exchange for the benefits of the offer to everybody. |
Compare Netflix's Online Video Model To Apple's Video Business Model by Alex Fletcher
Friday, February 1st, 2008 @ 11:32PM
An Analysis of the Apple and Netflix Online Video Models
It is easy to see how the online video arena is shaping into a hotly contested battleground between several of competitors. Thus far, in a category where an undisputed leader has yet to emerge, there is certainly room for a number of players to rise to the top. As a result, shakeout and consolidation are in the forecast for this space just as they are for other key internet-related categories. A look at Apple and Netflix reveals that each company is uniquely positioned to emerge as an online video leader.
Apple, arrives on the heels of a iPod/iTunes powered run
over the past 4 years that has catapulted the company’s market share and brand
value in the process of changing the dynamics of personal music consumption. On
the other hand, the 10-year old Netflix is looking to make its mark in the
online video space by extending leadership from the online movie rental market
that it pioneered. Both companies stand at the cusp of a large-scale broadband
video revolution that promises to transform the distribution of movies, film
and television and result in an estimated 86.6% of the US Internet population
watching online video by 2011.
Understanding the
online video market today
While Internet video begins to deliver on its promise to
provide viewers with the content he or she wants, anywhere, across any screen
(TV, PC, portable device) anytime of the day. The key forces driving the growth
of online video will play a critical role in shaping its winners and losers. As
consumers are provided with more options to watch the content they have also
proved willing to pay and revenue derived from internet video has been on the
rise as a result. In 2006 online video generated $630 million, an increase of
an impressive 273% over 2005 ($302 million). The year-over-year growth rates
have been attributed mostly to in-stream advertising and download revenue.
Forecasts have placed the figure at over $4 billion in revenue by 2011.
According to a study by the Yankee Group, – 2006 US Digital Home Entertainment Survey – internet users who download or watch streaming video are predominantly young males with considerable disposable income (68%). A finding that points to the fact that online video services which appeal to a male audience will fare far better than those which do not. In effect, the content made available through such services must align with those younger males who are most likely to consume it. Therefore, selection that is representative across different demographics is not entirely essential at this stage in the existence of the online video marketplace, unless these demographics change significantly.
It is important to identify the key factors behind the surge in the online video space as well as their potential affect on players like Apple and Netflix, including:
One overlooked aspect of the online video market is the naissance of download-to-own (DTO) movies. DTO allows consumers to burn movies downloaded from the net to DVD and until recently, Hollywood, fearing a piracy outbreak, distanced itself from giving its approval. However, at the 2007 Consumer Electronics Show (CES) Sonic Solutions unveiled Qflix, a system for adding a digital lock to DVDs burned on a PC or a retail kiosk using the content scrambling system (CSS), all with the Hollywood studios approval. While it is too early to determine the eventual uptake for Qflix, it is safe to say that the verdict for DTO will affect the entire online video marketplace.
Netflix will be particularly affected by the fate of DTO, especially if Qflix can pick up notable traction in the next 12 to 18 months. The Los Gatos, California-based company might potentially lose a sizable chunk of its leading market share in the online DVD rental market if a reliable option for viewing movies downloaded to PCs as DVDs can emerge. Consumers might opt to subscribe to any one of the increasing array of online video stores and burn DVDs themselves instead of relying on Netflix to provide that service. Conversely, Apple stands to benefit tremendously if Qflix or a similar alternative brings the option of DTO to the mainstream. The main reason being, iTunes is able to pass the savings gained through digital distribution to customers meaning they will offer downloadable movies at a significantly lower price than competitors.
What it takes to win
Developing a cogent analysis of the impact of online video
services on Apple and Netflix requires each offering to be evaluated in terms
of how well it will meet the needs of online video audiences in 2008 and
beyond. The key to success for both Apple and Netflix is found in growing
online viewership as the basis for new revenue streams. This entails tailoring
offerings to meet the online video needs of consumers where the following
criteria must be met in the process:
The Apple model:
Online video as a gateway to increased hardware sales
Apple's iTunes video experiment of selling TV shows for
$1.99 and movies for upwards of $9.99 proved a great service to the 4% of
online adults who consistently purchase video on iTunes, but not one that
translates easily into mainstream momentum. More realistically, it won’t result
in what Apple really desires: increased demand for hardware like the iPod touch
and Apple TV. As it stands today, critical mass adoption won’t scale past early
adopters unless the company opens its online video model to include experiences
that are currently missing. Still Apple’s iTunes boasts a 90% market share
amongst paid video sites according to NPD Group and has done an impressive job
of translating brand equity and leadership in the digital music domain into a
position of strength in the parallel online video space.
Before crowning Apple the de-facto leader based on its success with iTunes, the only digital music store to reach scale, but also the third largest music retailer in the US accounting for at least 20% of all US music sales in 2007. Most of this success is owed to iPod, a simple device that practically reigns over the MP3 player market. On the heels of the “iPod revolution,” Apple hoped that by adding storage and a simple display, the device might be able to do the same in the video world. Yet today, a little more than two years since iTunes made the first episodes of ABC's hits Lost and Desperate Housewives for sale, Apple is still looking to lay claim to the wide open online video territory.
Strengths
Weaknesses
Opportunities
Threats
The Netflix model: Evolving
into a digital entertainment distributor
It is old news by now: Netflix does have its own digital
distribution plans. The company incurred raised eyebrows from analysts and
shareholders alike upon announcing that it would invest $40 million in the
launch of a streaming video service, this time last year (see: http://www.nytimes.com/2007/01/16/technology/16netflix.html).
So while the company’s DVD rental business appears to be in decent shape in the
near term, especially since it appears that the bloody price war between
Netflix and Blockbuster (BBI) is finally abating, its moves in the online video
space are taking shape as a bridge that will allow Netflix to transition from total
dependence on DVD rental just as contemporary forms of physical media creep
towards extinction.
The question is how cultivating efforts in the online video and DVD rental arenas can fit within Netflix’s business definition. Obviously there exists scale economies associated with offering both services. Currently the company has committed to tying its streaming service, Watch Now, to its current subscription plans instead of offering the services separately. This allows the services to grow as complementary offerings instead of implicit competitors in the early stages of Netflix’s entry.
Strengths
Weaknesses
Opportunities
Threats
Projected growth rates for 2008
In order to forecast the growth rates for these two online video services it’s important to consider certain quantitative realities that will potentially loom large. At this stage in the life cycle of online video, large scale realities will shape the trajectory of offerings in the space. Therefore, the following should be factored into any forecast:
With these numeric realities in mind, over the remainder of 2008 Netflix’s Watch Now service will demonstrate a strong growth rate since it is being bundled with the company’s traditional DVD-rental subscription service. Watch Now will undoubtedly lead in the online movie rental segment but expect Apple to continue to maintain leadership of the overall online video space. Even if the company’s yet to be revealed movie rental venture does not fare well right out of the gates, it will provide another outlet that competes head-to-head with Watch Now. On the other hand, it isn’t feasible for Netflix to challenge Apple on other grounds by extending its service in a meaningful way over the next eleven months. Most likely Netflix will spend the year refining Watch Now as Apple pushes the envelope and expands its reach across the online video landscape.
Alex Fletcher Fri Feb 1 11:41pm |
Looks like some text wasn't pasted correctly during submission...the quasi-sentence that states "When coupled with a 90% market share" should be ignored. Thank you |
Michael Long Fri Mar 7 11:33am |
Wow. Looks like the formatting won the day. |
Alex Fletcher Fri Mar 7 12:58pm |
Indeed. |
Compare Netflix's Online Video Model To Apple's Video Business Model by David Cassel
Friday, February 1st, 2008 @ 11:38PM
The problem isn't technological. (It's obviously already possible to encode movies into a digital format.) Apple, NetFlix, and all their competitors can't offers movies until they have movies to offer. So for the near future, everyone's at the mercy of studios. (Who are in turn concerned about rights management and protecting their business model.)
TV advertising only brings in $9 billion. (And last year's figure dropped $100 million from the year before.) Last June there was speculation that movie studios might even stop buying TV ads, because they were too easy to skip with personal video recorders. (Movie ads "have to be day-specific," one buyer told Advertising Age.) But online viewing allows networks to require the viewing of commercials, and some even require the user to click after the advertisement before displaying the next segment of programming. They're definitely considering the possibility of distributing popular programs themselves. (The writer's strike is an implicit recognition of the potential of downloadable video.) All this means that Apple and NetFlix will, yet again, have to reckon with the wishes of the major content producers.
STRENGTHS
Obviously that's also an opportunity.
August Jackson
Sat Mar 8 7:14am
http://www.apple.com/ipod/accessories/
Good observation that this is a potential vector of competition that neither Apple nor consumers seem to have exploited yet. I think the quality of the video output needs to be higher than it is currently.