A correction was made to this story. See details below.
Here's hoping that Netflix managers have the confidence to carry on with a plan that isn't just necessary for growth, but is essential to the company's survival.
Netflix CEO Reed Hastings is being second guessed by Michael Pachter, an analyst with Wedbush Morgan Securities. According to a story in Portfolio (via Wired.com), Pachter "would prefer that Netflix stick to selling movie-rental subscriptions."
Like many on Wall Street, Pachter can't see past the next quarter. He crunched the numbers and argues that Netflix is spending too much on building a digital-delivery service that enables users to download movies.
Netflix may drop as much as $70 million this year on the digital service. That equals to about 70 cents per share in 2008 profits. The company had to pay Hollywood studios $40 million last year for the rights to offer 10,000 films online. Pachter, who wants Netflix to reveal more details about the online service, said that if Netflix paid $70 million to service 100,000 customers, the company would be paying $700 for each.
"I would say they're crazy; it's not worth it," Portfolio quoted Pachter as saying. He added that he only likes the deal if most of Netflix's customers switch from receiving DVDs through the mail and start getting their flicks via the Web.
But that's not going to happen overnight. What Pachter doesn't seem to get is that the online distribution of movies is coming whether investors like it or not. Hastings said last week that he expects his DVD revenue to peak within five years. Perhaps the best proof that the move-rental business is on the threshold of dramatic change is the set-top box introduced two weeks ago by none other than Netflix.
Pachter should try the Netflix Player by Roku. The $99 device enables Netflix users to watch downloadable movies on their TV sets. Most Netflix subscriptions allow for the viewing of any movie at no extra charge. Netflix streams the films, which means no extended download times. The major flaw is that there isn't enough titles to choose from. That will come in time unless Pachter gets his way and Netflix doesn't shell out for a better film library.
Regardless, the service is cheap. It's easy to hook up. The quality of video is comparable to digital TV.
But will anyone be willing to watch their Netflix movies without fussing with red envelopes or waiting for the mailman? Hastings isn't the only who thinks they might. Heavyweights such as Apple and Amazon have jumped into the Web movie-rental business. Others are sure to follow.
"Netflix is betting that during this time, we can establish ourselves as a leader in the space," said Barry McCarthy, Netflix's chief financial officer, last week at the company's investor day.
To be sure, online video is still in its infancy. It will take time before it goes mainstream. But it's hard to find anyone in entertainment or technology circles that doesn't believe consumers will eventually embrace it.
The big question is whether Netflix can afford to wait to build a digital business and possibly watch its competitors cut its grass. I don't think it can. Putting off a digital strategy is a bet against the Web, and that's the opposite tack Netflix took to build itself into a movie-rental powerhouse with 8 million subscribers.
Blockbuster and Movie Gallery are examples of companies that hesitated to embrace the Web. Now, Blockbuster continues to try to prevent Netflix from taking more of its customers. Movie Gallery went bankrupt last year.
Correction: The story erred by making it appear that Michael Pachter had said it was "crazy" that Netflix was paying Hollywood studios $40 million to obtain movie rights. He was commenting about Netflix's overall investment in digital distribution.LAS VEGAS--Studios know how to make money in the traditional way--in the theater, via broadcast television. But the Internet still has them slightly flummoxed.
True, most of the major film and television studios are embracing the Web. But the exact formula for distributing their content while still making money remains somewhat up in the air.
Here at CES during a panel sponsored by Hollywood trade pub Variety, the heads of digitial distribution for Disney/ABC, Fox, Paramount Pictures, and Warner Bros. discussed what is and isn't working for them.
All present were adamant that there is no one good way to make money online yet. "We're using every model because consumers will ultimately decide how they want to consume (content)," said Tom Lesinski, president of Paramount Pictures Digital Entertainment. For Paramount, that means downloads of its films via iTunes, Xbox Live, Netflix Watch it Now, and the Vudu set-top box.
The head of Fox Entertainment's digital media group, Dan Fawcett, said the best way is to give content to people the way they're used to. "People online want things for free. They can get it for free on piracy sites," he said. "They are inclined to watch it with a reasonable amount of advertising, but downloading a movie that takes a couple of hours just to own it doesn't seem to be a very compelling consumer experience."
This, of course, gave Fawcett the opportunity to plug Hulu.com, the online video partnership between Fox and NBC Universal where some of the two companies' most popular shows are viewable for free with some ads.
Paramount's Lesinski agreed that studios have to "give (content) to people anyway they want," he said.
Digital content heads of major Hollywood studios at CES.
(Credit: Erica Ogg/CNET News.com)And so did everyone else: a constant familiar refrain from all of them was "letting consumers consume content when and how they want." But isn't the way they want it instant and free?
Other tidbits: All of them profess to like Steve Jobs. Some think Apple and its iTunes Store hold too much sway over the download business, but those on the panel didn't seem to agree. Warner Bros. called Apple "a great partner," and Paramount is really, really happy that 5- and 10-year-old film titles are selling in volumes of hundreds of thousands today on iTunes. Disney, perhaps unsurprisingly, was almost defensive of Apple. (Jobs is Disney's largest shareholder.)
"Apple wanted to legitimize the marketplace," said Albert Cheng, executive vice president of digital media for Disney-ABC Television. "They compete with so many other different options, including piracy. To say Apple has so much control is looking at a very narrow slice of pie."
All had plenty to say on the impact of the Web on professional content. But despite talk of successes with viral video, streaming branded sites, and partnership deals across different platforms, none had an articulate response when an audience member asked when online revenue would surpass traditional revenue sources for each.
After some amused stares with each other, finally Fox's Fawcett was able to stammer: "Nowhere in the forseeable future."
View complete CES 2008 coverage from CNET.
Edward Burns' latest film, Purple Violets, won't be coming to a theater near you, but you won't have to go far to see it. The movie is available to anyone with $13 and an account at iTunes. It is the first time a feature film has premiered at the Apple media store.
Burns first landed on the scene in Hollywood with his highly successful 1995 film The Brothers McMullen. He wrote, directed, produced and starred while managing to spend less than $30,000 putting together the vehicle that would pave the way for his role acting in Saving Private Ryan.
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