Hastings: Streaming Content Costs Higher Than DVD20 May, 2010 By: Erik Gruenwedel
With much of its sustained subscriber growth — despite a recession — attributed to the novelty of streaming, Netflix co-founder and CEO Reed Hastings said costs associated with licensing electronic titles from the studios exceed that of comparable DVDs.
Speaking May 17 at an investor conference in Boston, Hastings said it is a balancing act weighing the cost of distributing a title by streaming (about 5 cents) versus postage and handling for a title delivered via DVD rental ($1) against higher electronic license fees.
“We think we can continue to spend more money [licensing] and continuing to get more [digital] content,” Hastings said. “Do we have to bid against other people? We do. And that’s a natural part of the process.”
As a result, Los Gatos, Calif.-based Netflix has sought electronic rights to catalog movies and TV shows from third-party aggregators, including pay TV channels HBO, Starz, Showtime and Epix.
“We don’t need to only get the top movies,” Hastings said. “It is a more efficient architecture to license from pay TV than it is to try and compete with them.”
The CEO said ongoing “fundamental tailwinds” remain strong, including the shuttering of thousands of video stores nationwide, expansion of broadband connectivity in households, and adoption of Netflix streaming by the three major video game consoles: Sony’s PlayStation 3, Microsoft’s Xbox 360 and the Nintendo Wii.
“Clearly, what we are seeing is some kind of s-curve of streaming adoption,” Hastings said, alluding to the economic theory determining market penetration of a new product or technology from early adoption to mainstream popularity.
“The problem with being on the front-end of the s-curve is that everyone is wondering where the back-half is. And we can’t see it any better than you can.”
That said, Hastings said DVD/Blu-ray rentals, including a library of more than 100,000 titles, continues to differentiate Netflix from competing “copycat style” streaming competitors.
“It’s hard to tell if that is driving the growth versus how much is the attractiveness of streaming,” Hastings said.
The CEO downplayed press reports the online DVD rental pioneer has become a “cord cutter” for consumers looking to reduce their monthly cable bill.
“We haven’t been able to detect anyone who subscribes to Netflix and doesn’t get cable,” Hastings said. “We don’t have sports, we don’t have news. We have a tiny fraction of the movies and TV shows. It is really a supplemental video service.”
Indeed, Netflix for the first time topped 25% market penetration in the Bay Area – its largest geographic footprint in the country.