Note to Netflix: Roku box needs latest movies

news analysis Netflix, don't take half steps with your digital-delivery service. Give your users what they want, and what they want is the latest hit movies.

CEO Reed Hastings and his management team have hit a home run--or at least a solid run-scoring triple--by partnering with Roku, the company behind the Netflix Player. The $100 device enables customers to stream movies from the Web to their TVs. Most reviewers have applauded the device for its low cost, easy setup, and viewing quality (a good Internet connection means no stalling or long download delays).

But a month after the Netflix Player went on sale, I haven't read a single review that hasn't deducted points for the lack of films available with Netflix's streaming service. It's the biggest complaint from device owners I've spoken with.

The Netflix Player by Roku

(Credit: CNET Networks)

Mr. Hastings, you've done a good job by setting up your "Watch Now" streaming service with 10,000 catalog titles, but you need to go further. Let customers purchase new releases on a per-video basis if they want. Some might resent being asked to pay in addition to their monthly subscriber fees, but if you explain that Hollywood charges more for new releases, your customers will understand. Give us choice.

"Why would anyone feel alienated by this?" said Michael Pachter, a financial analyst with Wedbush Morgan Securities. "You can't get a better deal elsewhere. Netflix would be essentially giving you Apple TV without charging you for the Apple box."

This is an important comparison because Apple has already begun offering new releases for rent via iTunes. Trust me on this Netflix, you don't want to fall behind to Apple. And let me be clear. Hollywood hasn't barred Netflix from obtaining the latest releases. Netflix managers have acknowledged that they could have received the same deal as Apple. They chose not to, and I think that's a mistake.

Pachter disagrees with me. While he said he wouldn't be surprised to see Netflix experiment with streaming new releases, he likes the current hybrid approach: offering catalog titles for Internet streaming and mailing new releases in the form of physical DVDs.

"What Netflix is saying to customers is 'We're going to give you new movies on a disc and we're going to give you as much catalog and streaming as we can possibly deliver to you for (the same monthly subscription),'" Pachtel said. "That's a smart business model."

Netflix executives said during the company's investor day last month that most of the movies it rents are catalog titles.

But by ignoring the digital distribution of new releases, the company is leaving the door open to competitors.

In January, Apple cut a deal with the movie industry that allows iTunes to rent new releases 30 days after the flicks become available for sale on DVD. It would be nice to get them sooner, sure, but Apple is providing an option that Netflix is not.

It's important to note that Netflix's traditional mail-order business isn't affected by the same 30-day restriction. This is one of Netflix's biggest advantages over anyone delivering movies over the Web or on VOD.

Netflix buys physical DVDs as soon as they go on sale and, by law, Hollywood is powerless to dictate what the company does with its property. This means that by the time iTunes or VOD services are allowed to start renting movies, Netflix has been shipping those little red packages for a full month.

But discs are not the future. And I'm not the only one who thinks this way. Hastings predicted last month that DVD rentals will peak within the next 5 to 10 years, yet Netflix is leaving the Internet delivery of new releases to Apple and other competitors.

Here's why they may have gone this way.

Netflix doesn't serve a la carte
Subscription fees have helped make Netflix the No. 1 online video rental service. Founded in 1997, the company started out charging customers on a per-video basis and switched to subscriptions two years later. Not long after that, Netflix began offering unlimited rentals for a flat fee.

Since then, Netflix has steadily grown and snatched market share. In the quarter ended March 31, Netflix saw net profits jump 36 percent to $13.4 million, or 21 cents a share. The number of subscribers grew 21 percent to 8.24 million.

So why go back to charging users for each video they rent? They obviously are attracted to the all-you-can-eat model.

Netflix customers will gradually move to the Web
The Web hasn't taken over yet. There's plenty of time to boost the quality of Netflix's streaming library and consumers may not fully embrace Internet video until it's as good as watching a DVD.

While Roku's Netflix device offers easy access to movies and does away with the long download delays, it still doesn't offer the best-looking picture.

But improvements in download and streaming technology are coming rapidly. The Roku device is perhaps the best example of this. Adoption of Internet movie rentals could occur faster than anyone realizes.

And remember that advantage Netflix enjoys by being able to mail DVDs a month before Internet or VOD distributors? It's possible that might vanish soon.

The studios have a distribution structure whereby they cut deals to provide exclusive access to films for specific periods known as "windows." Theatrical releases typically come first, followed by home-video release, then pay-per-view channels, then regular cable, etc. This is why Apple and VOD services must wait 30 days before distributing rentals.

Take a look at this excellent story from the Los Angeles Times. Executives at some of the major studios, who used to believe that the Web and VOD services could hurt DVD sales, are experimenting with limiting the time an outlet has exclusive access to films. Others studios are testing whether it pays to make Web and VOD rentals available when DVDs go on sale.

Early indications are that Web sales don't eat into DVD sales.

This means Hollywood could conceivably break down the walls and give VOD and Web-movie distributors access to films as soon as Netflix gets them.

And look at the growing competition that's swarming into the sector. Apple, Amazon, Microsoft's Xbox, cable companies, and Hulu are all out to use digital distribution to offer consumers instant gratification.

Reader, I don't know about you but I'll choose instant gratification over waiting for the postman every time. I'm a film buff. Why should I be forced to decide what I want to watch in advance? Let me push a button and choose whatever movie I want.

I'd be willing to pay a premium for that.

So come on, Netflix. Spend big, move fast. Get your customers thinking of you when it comes to instant gratification. Gather expertise on streaming technology and pricing before your competitors.

The Internet and movie rentals are supposed to be your turf.

[ernestlehmann]

How about a slot in the Roku that lets you stick in your DVDs that you rented from Netflix. It burns the DVD and makes it available forever to you (as long as you keep subscribing to Netflix). Or how about this: once you've burned your DVD in the Roku, it makes that movie available to other subscribers via a Netflix P2P (Netflix subscribers only, of course).

[wjskinner]

Amen. whats even more annoying is there are thousands of titles on Netflix that are not availble for streaming at all and the vast majority of them have been out on DVD FOR YEARS!. For instance episodes of 24 from seasons 3 and 4? Why arent they available? How about the Ten Commandments? Nope. There are lots of other films I would include in my streaming queue but Netflix haas not amde them available and in fact makes it seem like its the studios, rtaher than Netflix that is suppressing their availability for streaming. the Roku box is great but content is still king.

[James7777777]

I disagree. Netflix is doing everything right. For a small monthly subscription I can have all the content I want and almost all content is available. New releases are available on dvd which is great as I get the full experience, if I find myself with time in between dvds I can watch other content streamed off the internet.

If they charge per movie people will not understand, they will see a higher bill and be upset. Why should I pay extra to stream it when I can have it mailed for free?

I know everyone loves Apple at the moment, but I really don't expect them to over take Netflix.

[jrbtempe]

I don't expect the 10,000 catalog titles to expand much in the near future... in fact, my small video distribution label (who has maybe 50-60 of those 10,000 titles up on the service) was just informed by our buyer at Netflix that their budget has been frozen through the summer, which means they're not taking our July, August and September titles until the end of the summer or early fall at the earliest. Not a good indication that they plan to expand the catalog, especially when they're paying licensors nickels & dimes to begin with...

[berbar]

Yes, it would be nice to have a more up to date streaming catalog. It would also be nice if they didn't cancel the profile feature.

[zanely]

Why would reviewers deduct points for the device because the content provider doesn't provide the movies that they want? Do people deduct points for DVD players because of the content? The Roku either works or it does not work; it provides a good experience or not. If you have a complaint about the content, then you should complain to the content provider and its business partners, but don't fault the device. My understanding is that the Roku will have utility and connectivity options beyond Netflix so let's focus focus on whether the device has a value and then go beat up Netflix and others to provide content.

[Crunchy Doodle]

If the Roku Netflix box was not specific to Netflix only, you'd have a point. However, the box is an extension of the limited selection of streaming offerings on Netflix, so it's ripe for that criticism.

[gerrygadget]

The studios are a fickle and controlling lot that are probably more of what's limiting Netflix than anything else. But if it turns out that Netflix just can't crank out the streams fast enough or can't encode the streams fast enough, that's a whole different problem. My guess is Netflix would surely offer the good stuff if they were allowed to, but the studios aren't sure if any price is good enough to let the cow out of the barn.

[chasfenwick]

One very important point is missed in this article. There seems to be an assumption that the internet service providers will keep expanding bandwidth to service whatever demand there is, at a tolerable price. Some of them are nearly broke now, without making the heavy investment implied.

I am supposed to have 5 mbps service from Charter Communications, and based on my experience thus far with Roku I would say that it is doubtful that a satisfactory connection will be made with any consistency. Note also that several ISP's are now experimenting with charging by monthly usage of bits. This could kill all of this movies on demand stuff almost instantly, since the number of bits in just one movie is huge compared with any other use of the internet by individuals at home.

[chasfenwick]

One very important point is missed in this article. There seems to be an assumption that the internet service providers will keep expanding bandwidth to service whatever demand there is, at a tolerable price. Some of them are nearly broke now, without making the heavy investment implied.

I am supposed to have 5 mbps service from Charter Communications, and based on my experience thus far with Roku I would say that it is doubtful that a satisfactory connection will be made with any consistency. Note also that several ISP's are now experimenting with charging by monthly usage of bits. This could kill all of this movies on demand stuff almost instantly, since the number of bits in just one movie is huge compared with any other use of the internet by individuals at home.

[chasfenwick]

One very important point is missed in this article. There seems to be an assumption that the internet service providers will keep expanding bandwidth to service whatever demand there is, at a tolerable price. Some of them are nearly broke now, without making the heavy investment implied.

I am supposed to have 5 mbps service from Charter Communications, and based on my experience thus far with Roku I would say that it is doubtful that a satisfactory connection will be made with any consistency. Note also that several ISP's are now experimenting with charging by monthly usage of bits. This could kill all of this movies on demand stuff almost instantly, since the number of bits in just one movie is huge compared with any other use of the internet by individuals at home.

[mscritsm]

Actually, this could result in a net reduction in bandwidth. Why? I suspect that many illegal downloads are done by packrats, i.e., people who grab every movie they can and squirrel it away, never to be viewed. I must confess to being a packrat myself to the extent that I have hundreds of hours of programming recorded on my TiVos that I'll never have time to see, and I suspect I'm not the only one.


But a service such as Netflix could be a cure for that. Once Netflix's internet delivery service matures, it will sink in that any movie you may want to see is instantly available whenever you want to see it for a flat monthly fee. Suddenly the need to grab a lot of content off the net that you'll never view will go away. The result should be a huge overall reduction in internet bandwidth used for video.


Of course, there will still be college kids and others who are too cheap to buy a movie ticket, and who will settle for an inferior copy filmed in a theater, but overall Netflix's new service could still be a good thing for the net.

This story's information is outdated. Apple has already announced deals with several studios to release movies the same date as the DVD release. All the more reason Netflix needs a fire lit under them.

http://www.apple.com/pr/library/2008/05/01itunes.html

Link to press release. Apple is already releasing movies on iTunes the same day as the DVD release. Netflix no longer has a 30-day DVD advantage.

[skull one]

I have Roku's box and the quality is decent for me. Not DVD quality but looks ok on a 37" TV. What I don't get with this 10,000 titles, is that many of the titles it has had and still has when manually looking for a movie do NOT show up under the instant watch queues for easy access. Also I dislike the ability to have a profile since I watch movie that are inappropriate for my children and I don't want to have to worry each time if the next movie coming (which might or might not be the next one in my queue) is one for them. Finally it would be nice be able to Filter your selections and what is shown to you based off of choices YOU make.

[skull one]

Oops forgot to mention speeds...my typical download speed on the DSL service I have is 1-1.5MBs.

[cpeterka]

I'm assuming there are probably three problems, two that Netflix can address, and one for us users.
1. More Movies... That's simply Infrastructure for storage, streaming, etc from NetFlix,
2. More Moveis.. getting permission to send them, I'm sure Stark Industries will want a small fee for every copy of IronMan that is sent out.
and
3. Will Comcast, Verizon, etc want to start charging us more when we start watching movies 12 hours a day for 31 days each month ?

ChasFenWick is correct on his worries.

[sandonet]

Hi Michael J,

You are referring to Apple's downloads for purchase. You can buy a movie download for $14.99 at iTunes on the same day they are released on DVD. But you can't rent a download until a month later. Thanks for reading. GS

[bdennis410]

My vision is Anything, Anytime, Anywhere.
To whatever extent Netflix, Apple and others perceive this as the future, they are on the right track. Internet/Cable/Fios/WiMax delivery of Any content (new Release movies-more later), current news, music, text, data, all are important to the Content horizon-Anything, Anytime, Anywhere.
Roku is a potentially important interim step to this goal, but as currently positioned fails to seize the marketing high ground-First Implementer status.
Why can't Mission Impossible V have an Internet New Release Pay-Per-View schedule?
Imagine 10,20, 30 million or more U.S. households(and potentially the same amount outside the U.S.) paying $15.00, $20.00, even $30.00 or more for this opportunity.
$150,000,000 to $3,000,000,000,000! (No misprint, that's Billions!)
How's that for Content appreciation?
Then add later rentals, say five to one over theatrical viewers, another $300,000,000. Then DVD sales, for as long as that exists, another, what 20,000,000 at $15.00-another $300,000,000!
Pretty soon we're talking real money here folks!
So Roku and others, DVR, Xbox, whatever, start thinking Anything, Anytime, Anywhere.
What "appliance" fulfills that need?
Is it on your dwaring board yet, Apple? In testing, Motorola? Prototyped, Intel?
Call me.
Mediaman

[betteguadalupe]

Why fix something that isn't broken, Keep Netflix the way it is ..I make a queue, I get my movies
I look at the movie send it back and get more movies..Simple and efficient..

[mscritsm]

One reason why Netflix may not be rushing to make more recent movies available via the internet: They have a huge investment in regional centers to handle DVDs. This investment was made with the assumption it would be amortized over some number of years, certainly much longer than their current average age. If they switched the bulk of their offerings to the internet sooner rather than later, these investments would probably have to be written down, at a huge hit to earnings.

And a note to Mr. Sandoval: Every review of the Roku box and the Netflix service has taken points off for limited offerings, including David Carnoy's review here at CNet (see http://reviews.cnet.com/digital-media-receivers/netflix-player-by-roku/4505-6739_7-33018087.html?tag=prod.txt.1 ).

[chasfenwick]

It is true that Netflix has a huge investment in their regional centers that handle DVDs. On the other hand, delivery via internet saves them the two-way mailing costs and eventually would allow them to start closing down the mailing centers. But I think that the jury is still out on whether Netflix customers will find the Roku method of delivery to be satisfactory, especially as more of them want the Blu-Ray picture quality, which is not now supported by the Roku box and would make the ISP bandwidth issue even more serious than it is already.

[ev61]

Netflix is not broken, nor is the Roku box. What is broken is the movie studios strategy. As a movie buff, one does not need the newest releases right away. Sure, they sit at the top of the queue waiting to be shipped, but my queue is 200+ titles long. For under $20 a month, I get new releases, all the old stuff I can watch and the ability to stream. Who cares if you can't stream Fool's Gold, you can watch The Treasure of the Sierra Madre anytime. Sure, something great comes along and you want it right away, but that is why you go to the theatre. All this complaining from a small vocal group...

[quietman928]

Just an aside; to the majority of Netflix subscribers there is the option of "instant view", a service provided at no additional charge to the monthly subscription rate.
Granted, the catalog isn't as large as the available rentals, and doesn't always offer new releases, but for an insomniac such as myself it is a much appreciated service.
The selected movie starts within thirty seconds of hitting "Play" and if your download speed is decent, so is the picture.
At four (and I believe three) at a time subscriptions the number of times you can watch instantly is unlimited.
I know that IE is required; I don't know if Mac is supported.
I pass this along because although a longtime Netflix subscriber, I wasn't aware of this opportunity until recently, and thought that others might benefit from this bit of information.

quietman928

[xelalex24]

I personally, as a netflix customer do not want to pay extra for downloading movies over the internet, but I do expect that Netflix begins showing the new releases through their watch now service.

Where I would compromise is for them to limit the amount of news release movies I can watch in a month. So what they could do is make a new release status for movies that stays for a certain amount of time, and during that time, if you watch that movie, it will count as one of your alloted new release movies for that month.