Photo via Flickr user Jason Permenter http://www.flickr.com/photos/volcanologist/3178370365/
Know this: I love Netflix and I believe that video streaming is the future of video delivery. Unfortunately, I think Netflix and HuluPlus are going to fall on their swords in their current form.
Let’s look at how the odds are stacked against Netflix: They have content costs (which the studios are finally seeing the upside of this delivery) and delivery costs (servers and postage). In truth, they can control few of these costs. Let’s take a look at a key competitor: Comcast. Comcast is the largest cable and internet provider in the country. They’ve been trying to squeeze more money from Netflix since the service consumes nearly 30% of peak internet traffic. A company like Comcast also owns Universal Studios and NBC, a leader in movie production and owner of cable’s most popular networks and shows. Finally, Comcast makes a good deal of money off on-demand programming and wants to compete directly with Netflix to maintain their market share. In this example, a competitor controls Netflix’s two central costs: Delivery (charging more for bandwidth usage) and content (charging more for Universal Studio movies and NBC Universal shows) while directly competing against them. There are other media companies (Time Warner, News Corporation, Disney, AT&T) that are in similar, but not identical, positions.
Netflix is being squeezed from all sides; they had no choice but to raise prices. And to those who are mad about a price increase? Guess what: it’ll happen again…it has to. (For the record, Netflix could have handled the price increase in a much better way than it did, but that’s for another post.) Netflix can’t survive on a fixed pricing structure. They’ll have to eventually switch to a tiered based subscription system in order to stay afloat in the current market. This means charging a higher subscription for new releases, a lower charge for older movies, etc. Unfortunately, Netflix’s highly effective marketing will never allow them to institute a pricing strategy based on number of programs streamed per month.
HuluPlus, on the other hand, has an interesting paid vs. non-paid strategy. The non-paid is advertising heavy and only available on the computer. The paid version removes some ads (but not all, which I think is a major blunder…I won’t pay a premium for ads thanks to my Netflix education) and offers HD that is viewable on multiple devices. While this is enough to warrant a low monthly subscription, HuluPlus also offers new shows not available on Netflix.
Sadly, with the pending sale of HuluPlus, it is heading for the same problem that is plaguing Netflix. The rumored most likely buyers are all tech-oriented companies such as Apple, Amazon and Google; the content companies (NBC Universal, Disney, News Corporation and others) are stunningly abandoning ship (NBC Universal is being forced by the feds in order to get approval for the Comcast buyout). In this role, a tech company won’t cut it. Without the backing of a content provider, HuluPlus will suffer from the delivery and content squeeze as Netflix and the only key market differentiator will be minor in the user’s mind. Hulu needs to go to a content-rich company.
So what does the future hold? Video streaming is the future of delivery (sorry local TV affiliates) but the chances of a single source provider, like what iTunes did for music, is unlikely. The iTunes pricing model won’t work for television programs. Most songs can be heard independently, whereas the nature of television is more linear. You have to see several episodes in a row in order to develop a following for a program. It could be an opportunity for show producers to sell subscriptions to seasons in advance, which would give the audience a much larger voice in the direction of the program and return greater profits to the television production companies. I could envision TV episode viewing parties with such a model.
Movies may be able to follow the iTunes model, but the studios are less likely than music producers to support it. With albums, you can count on the sales of 1 or 2 songs out of a multi-track album to carry your profits. Movies are designed as a one-hit financially, you either stream it or you don’t.
In any event, to properly plan for the future I would recommend investing in a digital video server that can play music, movies and pictures throughout the house while also streaming such programs as Netflix, HuluPlus and others. Such hardware will be flexible for the future and most likely accommodate whatever service eventually does dominate in a sustainable way.