Netflix: VOD Ready, Focus Still on DVD7 Dec, 2006 By: Jessica Wolf
Netflix is gearing up for the digital-distribution market.
The online rentailer has some unique offerings to bring to digital downloads when the company announces definitive plans for the space in January.
But it's not going to be a simple switchover for anyone, said Ted Sarandos, VP of acquisitions for the company, speaking at the Cowan & Company 2nd Annual Internet Conference last week in New York.
That goes for technology issues, business strategies and consumer behavior, he said.A biggie is the fact that consumers have pretty much spoken to the effect that the PC is not the preferred device of choice for movie viewing, Sarandos said.
“Getting Internet to the TV has to be simple, cheap and mainstreamable before it will take over packaged media,” he said. “The fact is DVD is more portable than electronic files are today.”
Where Netflix stands to shine once the service launches a digital-download offering is the company's strong connection to its more than 6 million subscribers, Sarandos said.
Netflix has a trust relationship with those renters, existing credit card relationships and “we understand their tastes better than anyone,” he said.
“What we can add [to the digital download market] is we can bring consumer behavior to it right away because our base is already actively involved in using the Internet to interact with movies,” Sarandos said.
Of course, for Netflix to get into the electronic-sellthrough game, their subscription program may have to go by the wayside due to the lucrative and longstanding exclusive-subscription contracts Hollywood holds with premium cable channels such as HBO, Showtime and Starz.
Those exclusive deals can span more than a decade, and have been “free money” to the studios because the aforementioned cablers pay an upfront percentage (as much as 15%) of the box office to get the biggest hits on their channels, Sarandos noted.
But, the biggest hits these days actually bring in the smallest audience on those channels as the market has shifted to a sellthrough mentality, Sarandos said. Those cable channels now differentiate themselves more with original programming.
Given that, studios may, over the next several years, find themselves willing to take less from the cable subscriptions to ensure their films will be available more ubiquitously across other distribution venues, he said.
In the meantime, there does seem to be an inordinate amount of grey matter spent on a business that is, by any accounting, fledgling, Sarandos said.
Sarandos said he thinks the studios have a real opportunity with high-def discs.
“There's been so much attention to downloading there hasn't been any time spent on why [the high-definition launch] has been so botched,” he said. “It's almost like they are overlooking a $35 billion industry in favor of something that might be a $1 billion industry in five years.”