Top 10 Film Industry Stories of 2010: #3
2010 Is Netflix's Coming Out Party
By David Mumpower
January 28, 2011
BoxOfficeProphets.com
The war Netflix ended was its conflict with Blockbuster, who can no longer be seriously described as anything other than a fading challenger in the video rental marketplace. Time and again, Blockbuster’s team of decision makers proved far too slow to react and far too dated in their evaluations of consumer behavior to pose a continued threat to Netflix. Oddly, the advance in popularity of Netflix’s remaining major competitor, Redbox, proved to be the deathblow to Blockbuster. The company never positioned itself effectively for pricing battles, which is why a subscription mail service was able to gain a strong foothold in the video rental market in the first. When Redbox started placing vending machines at most major shopping centers and charging only a dollar a rental, Blockbuster showed how hopelessly out of touch it was. They countered by creating their own machines and set their rental prices at $1.99. To Blockbuster, simply putting their corporate logo on the kiosks should justify a 100% surcharge. The results were predictable and in fact predicted in this forum over the past 24 months.
With Blockbuster and its equally dated competitor, Movie Gallery, collapsing over the past two years, Netflix took complete control of the video rental industry. On the date when Blockbuster declared bankruptcy, Netflix’s market share in the video rental market was 36%, almost the equal of all brick and mortal video stores combined, 39%. Netflix was also far ahead of Redbox’s 25% market share; the battle for video rentals is over and Netflix is the winner.
Rather than rest on their laurels, Netflix management demonstrated the sort of proactive leadership sorely lacking at Blockbuster. Beginning in January when they made a deal with Warner Bros., Netflix placed their focus squarely upon the evolving video streaming market. The outcome has exceeded even their best case scenario results. Netflix had forecasted 3.6 million new subscribers in 2010; the actual total was 7.7 million. They added 3.1 million subscribers in the fourth quarter alone. The key was not the physical media by mail service. Instead, it was the addition of a new $7.99 monthly plan for streaming rentals only. Over a third of new Netflix users during the applicable time frame chose that, the lowest priced pricing tier for their service.
There are several aspects of Netflix’s ascension that are noteworthy. If we define them as a video subscription company, their current subscriber base of over 20 million places it ahead of Time Warner Cable as the second largest such company in existence. Only Comcast with their 23.8 million subscribers are ahead of Netflix. If the latter company’s assertion that they should have 22 million subscribers by the end of March holds true, Comcast will be pushed to second place by the middle of 2011. Conversely, if we define Netflix as a (new and different) pay channel, their numbers are superior to Showtime (18.5 million subscribers) and Starz (17.4 million). The latter is particularly noteworthy in that access to the Starz catalog is key to Netflix’s soaring popularity as a streaming video service. With that contract set to expire in the first quarter of 2012, Starz may no longer welcome the idea of aiding Netflix, who has evolved from an ally into a major competitor. In fact, only HBO has a larger built-in subscriber base with 28.3 million. If Netflix adds the same number of customers as last year, they will be neck and neck with HBO by the end of 2011.
If you are scoring at home (which would be weird), Netflix has put a dagger in Blockbuster and Movie Gallery, implemented a business practice that severely wounded a major competitor in Redbox (the 28 day wait policy discussed in an previous 2010 Film Industry Story), and now surpassed Time Warner Cable, Showtime and Starz in terms of subscribers.
What a 2010 Netflix had.
Of course, there is another shoe waiting to be dropped due to the miraculous rise of Netflix. If this many new customers are streaming this many new movies, someone has to foot the bill for this emerging consumer behavior. As all of us run headfirst into the movie streaming process, our ISPs are suddenly getting hammered with unprecedented bandwidth charges. A mid-November report from Sandvine, a net monitoring business, indicated that roughly 20% of American Internet traffic during peak hours is Netflix streaming. By the end of December, estimates had moved up to 25%. Just spin that over in your head for a moment. One out of every four data packets during the average evening is routed to Netflix. If you are the person footing the bill for said data packets, what would your inclination be? If you say, “I would try to send Netflix the bill”, your synapses are firing the correct way.
This is the war Netflix started in 2010. Major internet providers such as Comcast and Time Warner also happen to be the competition mentioned above. Right as Netflix has identified itself as a major threat in the constant corporate battle for the family living room, they have also caused extreme rate increases for all ISPs. If you evaluate any business in the world, you would be hard pressed to find a scenario wherein a major competitor effectively arrives out of nowhere and finds a way to bill you for their growing popularity. The victims thus far have been smaller ISPs who are crying foul over the fact that previous usage agreements between them and larger internet backbones are being discarded. Pay per bandwidth service, a dinosaur notion in the age of readily available Internet access, is suddenly being considered once more.
The reason why is perfectly understandable. There were 12.3 million Netflix subscribers at the start of 2010. There are over 20 million today. That’s a 63% increase in potential bandwidth users all grabbing their eating utensils and lining up at the buffet. Who pays for that? Right now, Netflix’s newly declared mortal enemies are. Does that seem likely to hold true indefinitely? Hell no.
Netflix is growing at a rate previously reserved for 1950s science fiction movie radiation monsters. As their business continues to expand at a historic rate, the bandwidth their subscribers devour becomes a bigger issue for service providers. A war with the major ISPs is in the offing, but Comcast and et al should take note of what happened to Blockbuster. They never took Netflix seriously enough right up until the moment they were devoured by the beast.