Tuesday, January 13, 2009

The End of Netflix

The Wall Street Journal today is running an interesting article about Netflix and the transition to online video streaming. They article postulates that while Netflix has come to dominate the DVD by Mail business model, they are at a severe disadvantage when it comes to online streaming. They are up against big name competitors such as Amazon and Apple as well as having to deal with companies such as HBO who have already stitched up exclusive rights to stream many movies online.

I think what the article misses is the incentives of the movie studios. They have watched as Apple has become the de facto distributor of online music, to the point where they now can dictate terms to the record labels. The labels have struggled ever since to try and build up viable competitors (trying especially hard with Amazon's mp3 store), but so far they have been unsuccessful.

If the movie studios are smart, they will move fast to diversify their distribution contracts and try to get a full selection of online movies into as many hands as possible. By fragmenting the market they will be able to play the providers off against each other to get better terms. If this is the case, then Netflix will be on as good of footing as anyone else. The key to success will come down to the user experience and who can get the most users in the door. They already have a key advantage of having millions of paying subscribers who associate Netflix with online movies. I think the author of this article may be a bit surprised at how the online video market will play out.

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