Netflix – Tech.pinions

Pay TV Isn’t Going Anywhere

With each new day comes a new article about a tech writer’s failed attempt to cut the cord and a follow-up about how the Netflix model is the future of television. TechHive’s Mark Sullivan gazes into his crystal ball and predicts cable TV will be a relic of the past by 2025.

At the end of the first half of 2013, roughly 55 percent of the U.S. population (age 13 and up) had some type of streaming video subscription, says research house NPD. Of that total, 30 million subscribe to Netflix, at least 7 million watch the Amazon Instant Video service, and Hulu counts more than 4 million Hulu Plus subscribers.

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“Over-the-top video is not small anymore,” says Brightcove’s Lai. “Netflix has 100 million subscribers, 30 million of those are [U.S.] streaming customers. Apple has sold 13 million Apple TV devices. Compare that to the cable operators. The biggest of them, Comcast, has no more than 22 million subscribers. All the pay TV operators combined have about 95 million subscribers.”

According to Netflix’s quarterly earnings statements, the company currently serves roughly 30 million U.S. subscribers and 9 million international subscribers. That’s a far cry from 100 million. Let’s look at the numbers from the major cable service providers. I’ll pick the big three in the United States: Comcast, Cablevision, and Verizon.

Comcast

Number of subscribers: 24.4 million
Revenue Q2 2013: $5.175 billion (video only)
Base monthly cost: [$70.49](http://www.oregonlive.com/silicon-forest/index.ssf/2013/08/comcast_cable_tv_rates_going_u.html)

Cablevision (PDF download)

Number of subscribers: 3.224 million
Revenue Q2 2013: $1.402 billion
Base monthly cost: $54.95

Verizon

Number of subscribers: 5.035 million
Revenue Q2 2013 (includes all FiOS services): $2.7 billion
Base monthly video cost: $49.99

Side note: Could not locate individual video revenue for Verizon.

Compared with the big Internet streaming services:

Netflix

Number of Subscribers: 38.6 million
Revenue Q2 2013: $1.1 billion
Base monthly cost: $9

Amazon Instant Video

Number of Subscribers: Amazon doesn’t release this information, but Prime subscriptions were at around 7.2 million in 2012.
Revenue Q2 2013 (Amazon Prime subscriptions only): Amazon doesn’t release this information, but back of the napkin grain-of-salt math would put Prime revenue at $568.8 million in 2012.
Base monthly cost: $6.59 ($79 per year)

Hulu Plus

Number of Subscribers: 4 million
Revenue Q2 2013: Hasn’t released this information, but allegedly earned $695 million in 2012
Base monthly cost: $7.99

Netflix has 14 million more subscribers than Comcast and pulls in a fraction of the revenue. This is understandable since Comcast charges eight times the amount for its basic service and more than 10 times the amount once you’ve added on your movie and sports packages, but Netflix’s paltry income doesn’t mean its costs are less than those of the cable companies.

Rebecca Greenfield at The Atlantic breaks down the economics of it all:

With Netflix spending a reported $100 million to produce two 13-episode seasons of House of Cards, they need 520,834 people to sign up for a $7.99 subscription for two years to break even. To do that five times every year, then, the streaming TV site would have to sign up 2.6 million more subscribers than they would have. That sounds daunting, but at the moment, Netflix has 33.3 million subscribers, so this is an increase of less than 10 percent on their current *customer base.

Remember, Comcast, which serves 40 states, has 24.4 million subscribers. Netflix’s U.S. base is almost six million more than that, so they’ve already recouped their cost on House of Cards.

Then there’s HBO (emphasis mine):

HBO gets about $7 per month per subscriber from its 30 million or so fans, according to an analyst at SNL Kagain. Although the charge for HBO on your cable bill is something like $15, HBO splits the fee 50-50 or so with your cable company, according to The Economist. That puts it pretty close to Netflix. Those revenues also pay for some of the most expensive TV on cable: True Blood came in at around $5 million per episode. The debut of Boardwalk Empire cost $20 million alone. Then again, HBO is a prosperous outpost in a huge media empire, which helps with marketing and infrastructure costs. Netflix is all on its own.

HBO has the full backing of the cable companies (fueled by commissions from sales staff) working to build up its customer base. It has an established infrastructure that allows it to produce its own content, as well as license content from various movie studios. It’s been at this a long time and knows how much it has to pay to air the latest and greatest films once they’ve reached video. To studios and cable operators, HBO isn’t just a channel, but a globally known and beloved brand. As the slogan says, “It’s not TV. It’s HBO.”

Netflix, however, continues to shoot itself in the foot:

The real problem for Netflix is that their subscription revenue is not growing as fast as their content costs. Michael Pachter, an analyst with Wedbush Securities, told Bloomberg News’ Cliff Edwards. “Netflix will continue to generate negative cash flow going forward, driven by the company’s ever-increasing streaming commitments,” he said

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Basically, subscriptions haven’t kept up with high costs for content, like this $200 million one with Epix to lease Paramount, Lionsgate, and MGM hits.

Netflix has seen the effect original programming has had on channels like HBO and Showtime. The key to obtaining and maintaining subscribers is to provide content they can’t get anywhere else. I can only watch Boardwalk Empire on HBO and I can only watch House of Cards on Netflix.

However, I (and I’m sure many other people) also subscribe to HBO in order to watch hot new releases without wanting to rent or buy them from iTunes. I come for Game of Thrones, but I stay to watch Les Miserables on a Sunday afternoon. That’s where Netflix is seriously lacking. Its current average rate of nine million subscribers a year won’t go on much longer while its non-original content offerings are as sparse as they are. Aside from some great TV shows, the film selection looks like a SyFy channel B-movie marathon.

Compounded with its chronic overpayment for content from all over the world, Netflix’s current strategy doesn’t seem sustainable. Will it focus more on providing exclusive original content, or will it pump money into licensing deals with studios for better films? Since it doesn’t have the support of a filthy rich daddy like HBO does, it needs to choose wisely, especially since it’s working overtime to pay off its $500 million debt.

I completely understand the want and need to cut the cord. I’d love to see Sullivan’s fantasy come true. Paying upwards of $150 per month for cable and Internet from price-gouging, customer-hostile cable companies is awful and expensive. I hope the future will be different, but 10 years isn’t that long, especially when we’re talking about a glacial industry such as television. And if the music industry is any indication, streaming is not the solution everyone had hoped it would be.

In order for Internet television to truly take off, broadband needs to be available everywhere and it needs to be faster. Rural areas still have no viable option for speedy Internet except for cost-prohibitive satellite services. The same goes for cable TV, which is probably why products like these still exist. Speeds must also be unthrottled and increased across the board, and that will require substantial upgrades to existing infrastructure, the cost of which will be passed down to the consumer.

Bottom line: You’re either paying a lot for cable, or you’re paying a lot for Internet. The idea that getting rid of cable will be cheaper in the long run is merely a myth.

Netflix is growing and it’s becoming a major player in content distribution. However, it is not an empire. It does not have the pull in the industry that the cable companies command. It believes in overpaying for content in the hopes that the investment will encourage new members to sign up, but spending hundreds of millions of dollars on 6-7 original shows with very little (or no) return on investment is a dangerous way of conducting business.

I have no doubt that streaming content services will grow substantially in the coming years, but will they kill cable within that time? To quote Betteridge’s Law of Headlines: No.

Why Netflix Already Won at the Emmys

I had the opportunity of going to the first Cable Show that HBO showed their product at many years ago. In those days, the big networks were ABC, CBS and NBC. While cable was gaining as a TV delivery medium, most of the channels available were also available over the air. However, some channels were beginning to be created just for cable, such as the Food Network and HBO was proposing something very interesting at this time in what they called premium programming. This meant that along with paying for the cable feed, a user would need to subscribe to get their special HBO services, which in those days was just movies.

HBO popularized the premium channel concept and literally laid the groundwork for other premium programming. Now there are dozens of premium channels to subscribe to and well over 75% of the US households are cable subscribers today. In fact, in these passing years, cable companies have become the most powerful medium for video and TV content distribution and have become a big player in Hollywood and the movie industry.

At this cable show I got to meet with HBO execs that shared their vision of being the go to service to watch movies. While their early offerings were minimal they already had their sights on acquiring movie content from all over the world and establish themselves as the primary premium channel in the US. I remember distinctly them telling me that what they had was groundbreaking and could change the way people view TV content in the future. However, I am pretty sure that even in their dreams they did not envision a day when they would actually create original programming and become an actual television production company as well.

Industry Firsts

As the Emmy nominations approached last week, there was buzz in Hollywood and Silicon Valley that Netflix’s two shows that are now originally produced for them, Arrested Development and House of Cards, could become the first shows designed specifically for on-demand and over-the-air content distribution to receive an Emmy nomination. Up to now this has been the purview of dedicated production companies who created content just for the networks or the cable networks and an upstart like Netflix, with its OTA approach to content delivery was not supposed to have the skills or wherewithal to do anything other then just be a medium for OTA content delivery.

You have to give Netflix CEO Reed Hastings a lot of credit for the kind of visionary thinking that drove him to create original programming just for Netflix. It is ironic that less than two years ago he was considered evil because he split the subscription prices for mailed DVD’s and Online content into to separate services and industry execs and users alike complained to high heaven that this move was bad and unfair to their subscribers. But clearly Reed knew what a lot of us insiders knew that the days of DVD’s being mailed for viewing were numbered and delivering the same content OTA and on demand was the future of this type of content delivery.

With House of Cards and Arrested Development, Reed and Netflix has raised the stakes and as many insiders understand, OTA on demand services like Netflix, Hulu and others are really the future of many types of content delivery and with this move Netflix in essence has become the HBO of this new age. Of course, HBO has their own version of OTA services called HBO Go and more and more dedicated content providers are following suit with similar services since they all understand that OTA on demand on any device is the true future of content delivery. But Netflix’s leadership position at this time in history cannot be underestimated since Hasting’s has emerged as the elder statesman of OTA services and Netflix has to be perceived as a direct threat to the cable companies as the primary provider of TV and video content someday.

The Clear Future

With the Academy of Television Arts and Sciences Emmy nominations for House of Cards and Arrested Development, Netflix is now officially recognized by the TV industry and it confirms that they are a legitimate medium, capable of delivering original content through a brand new delivery system. I also believe it signals that the folks behind the Emmys actually understand that with these nominations they are actually giving their blessings to this new era where broadband delivery of Internet content and OTA services will be the norm and expect services like Netflix to be a part of the TV and movie industry framework from now on.

Regardless of whether House of Cards or Arrested Development actually win any Emmys, Netflix has already become a winner at this years show by nature of this giant endorsement of their labors and vindication that Netflix’s bet on creating original programming was on the money. This nod from Hollywood allows them to play with the big guns in the cable world and more importantly cements their position as the industry leader in providing OTA services that will eventually change the way most of us will receive our TV and video content in the future.

A side note: Over the weekend I got a chance to watch the first two episodes of House of Cards and now see why it received various Emmy nomination. Well scripted and acted, the story of Washington insiders is addictive and gives people a fascinating look at the inner workings in our nation’s capital. If you enjoyed West Wing, you will really love House of Cards.

Cord-cutters Beware: It’s Going To Get Expensive

Photo of cable cutting (Fotolia) The are many reasons why television viewers choose to cut the cord, to be among the 15% or so of Americans who get by without a cable or satellite feed. But probably the most important is the desire to pay less for the content by grabbing it out of the airwaves or finding it on the internet.

I have some bad news for penny-pinching cord-cutters. The more people choose to do without a cable subscription, the more expensive the over-the-top alternative is going to become.

The economics of this are stark. Charlie Ergen, CEO of Dish Network, describes the current U.S. environment as “90 million [households] paying $1,000 a year. I don’t think in my lifetime that number goes up.”

Broadcast stations still rely heavily on advertising, but the retransmission fees paid by cable and satellite providers, estimated at about $3 billion a year, are an increasingly important part of their revenues. That’s why broadcasters are so scared of, and are fighting so hard against, Aereo, which provides over-the-air TV over the internet without compensating the stations.

Basic and lower-tier cable-only networks also get advertising revenue, but their rates are often much lower and cable fees represent a larger part of their income. Premium channels depend mainly on subscription fees. Except for the relatively small amounts they pay through subscription internet services such as Netflix and Hulu+, cord cutters are not part of this economy.

Comcast, which plays in pretty much all aspects of the TV game, provides a good look at these economics. Last year, its cable operations generated $20 billion in revenues from video services. Of that, by far the biggest chunk, $8.4 billion, went to pay for content. Its NBC Universal unit received $8.8 billion from its cable channels, $8.2 billion from broadcast (including both the NBC network and 10 owned-and-operated local stations), $5.1billion from movies, and $2.1 billion from theme parks.[pullquote]Somewhere, money will have to be found to feed the content beast. Otherwise, it will be goodbye Game of Thrones, hello Survivor: Mall of America.[/pullquote]

By contrast total Netflix revenues last year were $945 million, the great bulk of it from 27 million U.S. streaming subscribers.

Somewhere, money will have to be found to feed the content beast. Otherwise, it will be goodbye Game of Thrones, hello Survivor: Mall of America.

A number of things are going to have to happen if a significant fraction of customers cut the cord. There’s going to be a lot less free stuff available and the paid content is going to cost more. TV show owners who now regard whatever they get from Netflix for old seasons of Mad Men as gravy will have to drive up the cost if that becomes the primary channel of distribution—and the $9 all-you-can-eat monthly Netflix subscription will be a thing of the past.

HBO will eventually decide to sell content to viewers without cable companies acting as intermediaries; it already has the infrastructure to do this in place with HBO Go. But don’t expect the cost to be much less than the $10 a month or so you’d currently pay for an HBO subscription (the bundling practices of both the cable operators and the content providers make it very hard to figure out the charge for any particular service.) Similarly, access to ESPN sports is going to cost at least as much as the $5 or so per customer per month that cable operators pay for the service.

A second thing that will happen is that content providers are going to become a lot less sanguine about account sharing. Trust me, the services know that you and your three closest friends are sharing one Netflix streaming account or that your college-student son has “borrowed” your Verizon FiOS login credentials to watch HBO Go and ESPN 3. For now, it’s more trouble than it is worth to stop these practices. But as over-the-top revenues grow in importance, the content providers tolerance of such cheating will shrink. A crackdown is inevitable.

Fortunately, getting your television over-the-top has some advantages other than price. You get to watch what you want, where you want, and on the device you want. But all those charges are going to add up, and by the time you’re done, you could be paying as much as you do for a cable subscription. Or more. The byzantine cross-subsidies created by bundled prices mean that at least some customers are getting more than they pay for. In the end, that one payment a month for a big bundle of content may look at lot better than it does today.

An Apology

I messed up. I owe you an explanation.

Well, not really. I was on a delightful trip to Colonial Williamsburg with my 92-year-old father and hero, Ken Lewis, and took a couple of weeks off from blogging and tweeting. I apologize for not staying in touch.

You see, apologies seem to be trending. One of the emails in my neglected inbox was from Reed Hastings, the CEO of Netflix, which angered customers recently with a blockbuster price increase and a confusing bifurcation of its DVD and streaming movie service.

Hastings began the email with an apology: “I messed up. I owe you an explanation.” He continued:

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

Did this appease angry customers or impress Wall Street investors? No. A million customers quit the service, and Netflix’s stock price is less than half what it was earlier this year. “Netflix seems to be making a snuff film starring itself,” a Dow Jones Newswire columnist just tweeted.

Then, the other day, the New York Times columnist David Brooks apologized for “being a sap.” Specifically, he apologized to his conservative readers for his previous admiration of President Obama’s centrist, willing-to-compromise, pragmatic approach toward Congress. Obama’s sin: Proposing a $4.4 trillion deficit reduction plan that did not completely cave in to the Republicans. Brooks wrote:

It has gone back… to politics as usual… I was hoping the president would give a cynical nation something unconventional, but, as you know, I’m a sap.

Did this appease angry conservatives bitter about Brooks’s earlier tolerance for Obama? No. The flogosphere erupted in a fury of anger, from both left and right.

In an email to The Atlantic, Brooks mused on the value of apologies:

One thing I’ve noticed is that columns in which you admit error generate more hostility than any other kind. I did a series on what I should have known about the Iraq war and the response from the left was more vicious than at any other time, and I was making a few concessions to them.

Either they smell weakness and exploit it, or they feel more self-righteous than ever. In any case, the lesson is that from a public relations perspective, politicians are probably right in never admitting error in public.

Does this hold true as well for business executives? Should you apologize to customers or employees or investors for upscrewing something big? Is the best policy never to apologize at all?

The obvious advice is to avoid upscrewing in the first place. But upscrews happen. The key is to apologize strategically.

Do you hear HP’s Board of Directors apologizing for allowing a once revered Silicon Valley company to spiral into chaos and irrelevance? Or for even considering Meg Whitman as the next CEO? No.

[I started to list companies that ought to be apologizing for something, but that would consume far too much space. I apologize.]

Remember in April when Sony’s sloppy security allowed hackers to steal credit card information from 10 million Sony PlayStation Network customers? Sony had to shut down PSN for 10 days, knocking 77 million customers offline.

Kaz Hirai, Sony’s No. 2 executive, held a press event to apologize. These screengrabs say it all:

And remember when Apple cut the price of the new iPhone by $200 just two months after introducing it? Steve Jobs, not otherwise known for contrition, issued a public letter of apology, explaining why customers were ungrateful wretches but offering them $100 credit toward buying more Apple products.

Which reminds me of the delightful Joy of Tech cartoon from 2007:

Anyway, I apologize that this post has gone on so long without a conclusion. I promise to do better next time.

P.S. Hey, Reed, how about an apology for naming it “Qwikster”?

Netflix as a Streaming Service is the Bandwidth King

News broke yesterday that Netflix was raising the price of its streaming plus DVD-in-the-mail plans. It was interesting to see all the backlash from some media and from consumers on Twitter. As much as this may be shocking in the short term what it really signals is the bigger picture story that Netflix is really a streaming video service not a DVD-by-mail service.

In fact I think this piece in the Wall St Journal got it right: Reed Hastings Doesn’t Want You To Pay More For Netflix. He Wants You To Stop Using DVDs.

If you noticed, the cost of their streaming only service did not go up at all. Only the packages that included an option for DVD-by-mail went up in cost. The age of Internet video is undoubtedly upon us. This reality is cemented in stone if we do a quick case study of Netflix.

I’ve recently analyzed a Q2 2011 report on Netflix from Sandvine Networks. Here are the key points from that report as I see it.

Netflix now accounts for 29.70% of all downstream traffic during peak period (evening traffic)
Netflix has 23.6 Million Total Subscibers
The average Netflix consumer consumes more than 40gb of data per billing period
Playstation 3, XBOX 360, PC, and Wii (in that order) account for 85% of Netflix traffic
Average consumer using Netflix on an XBOX 360 consumes over 80gb of data per billing period

To quote a statement from their report:

“It is difficult to understate how truly staggering the growth has been. Lest the reader think that this phenomenon
is limited to peak period, even when measured over 24 hours, and when measuring all traffic (upstream and
downstream), Netflix is #1.”

Netflix is now the undisputed bandwidth king of the Internet in North America. What’s more is that they have caught Comcast in total US subscribers both with just over 22 million.

What I find most interesting about the Netflix streaming service is how the non-techie community has embraced it. We are hearing more and more frequently in our interviews with mainstream consumers (non-early adopters) how they are turning to Netflix as a part of their prime time evening experience. The reality is for this to happen Netflix time is taking away from their service providers time. In fact we are beginning to hear frequently in these interviews how many are cutting the chord to cable and using Netflix streaming only.

These are telling signs about the value these types of services offer into the main part of the market. As more online streaming services from companies like Apple, Amazon and perhaps even Google continue to grow and become attractive, traditional MSO’s will have no choice but to adapt and adapt fast.

The Bandwidth Story
The real point I want to make is around bandwidth demand. The bandwidth Netflix is demanding from North American service providers is simply stunning. Keep in mind this is just one service. I expect many entrants into the streaming media sector from major players over the next 5 years. The impact on broadband will be overwhelmingly significant.

Not only are the bandwidth demand numbers I pointed out above only from one service; they are also only from one device and one concurrent stream. What happens when you have multiple people in homes consuming Netflix on a tablet, PC and TV all at the same time? The answer is the 29% of downstream traffic could double or triple.

The multi-connected-device reality that is coming is one i’m not sure the network and broadband providers are ready for.

Are Service Providers Prepared?
The Wall St Journal Heard on The Street section published a commentary on this subject titled: “The Time Bomb in Netflix’s Streaming Strategy.”

If we do see a continued explosion in streaming services how will the broadband service providers meet the demands of their consumers? Are the networks themselves capable and ready to handle this explosion of streaming media?

These are all questions we will have to wait to see how they are solved. I do however hope that whatever costs that get passed to consumers do not hinder the success of these services as the WSJ article suggests. What could very well happen is that the costs of traditional TV packages go down and data packages go up – just a thought.

It is in the best interest of the network and service providers to add more value to their broadband networks. Right now they believe their broadcast services are the most valuable but very shortly that value will transition into their broadband services. And that transition will happen on the back of services like Netflix.

Week In Review: Tech.pinions on the Key News of the Week

This week news came out revealing a clearer picture of how Microsoft is profiting from Android. Many large handset manufacturers are not having to pay Microsoft technology licenses due to patents owned by Microsoft Android infringes upon. This is important because it is only the beginning of the types of fees makes of Android devices could pay to not only Microsoft but also potentially Oracle. We are watching this closely because if the technology license cost surrounding Android becomes to high, it will likely impact the decision to go with Android on new devices.

Why Microsoft’s Android Ransom Matters

Facebook also announced this week that they have added video chatting as a communication option within the Facebook platform. They announcement also detailed that Skype (now owned by Microsoft) was the underlying technology making video chat within Facebook possible. It will be interesting to see where Facebook takes this and if and how they deploy it to mobile devices, thus enabling video chatting on mobile devices through Facebook. On that point, given that Microsoft and Facebook are so close, I would not be surprised if we see this technology first available on Windows Phone.

Should the Facebook-Microsoft Alliance Worry Google?

Apple also announced this week that their app store has crossed the 15 billion download mark. They also announced that in total they have paid out $2.5 billion dollars to developers who have distributed apps through Apple iTunes App Store. The significance of the volume of apps downloaded and the monetary benefits to developers, demonstrate Apple’s lead in both categories.

Apple’s App Store Tops 15 Billion Downloads: Eat Your Heart Out Google!

Netflix also made a significant announcement this week. They announced they are bringing instant streaming to Latin America and that their plans for later this year to add 43 countries in Central and South America, and the Caribbean to its list of supported locales is still on track. Netflix’s global streaming strategy is the key to them becoming the largest global streaming video service.

Netflix bringing instant streaming to Latin America, global domination plan on track