During yesterday’s Q3 earnings call, Netflix CEO Reed Hastings revealed the company’s plans to launch a streaming-only service which will allow users to watch movies via their PCs without having to sign up for the DVD-by-mail portion of the Netflix service. Unfortunately, this new streaming-only option won’t be available to any Netflix subscribers in the U.S. Instead, it’s a part of the company’s new international efforts which will launch in the second half of 2010, starting off small in one market then expanding into other countries one-by-one.
Hastings wouldn’t reveal which overseas market would be first to get the new service “for competitive reasons,” but he did say that their initial approach is to prove their model before offering the expanded service in other countries. By “proving their model,” what he probably means is figuring out how to turn a profit off a streaming-only option. The company has never attempted anything of the sort and will probably need some time to tweak it in order to make it work. It’s likely that Netflix wouldn’t even go this route if they had their way, but apparently, DVDs-by-mail isn’t an option for them overseas. When questioned about this, Hastings cited the “tricky” postal systems in other countries as making it too difficult to mail physical disks.
Although Netflix will try to make a streaming-only service work abroad, the company really doesn’t think there’s a demand for this type of offering within the U.S. In fact, when responding to a reporter’s question regarding Netflix’s plans for an a la carte option (there isn’t one), Hastings said that while they’re “open-minded to” an a la carte service that came without the DVD option, the company hasn’t seen much interest in something of that nature in the States. “Everybody also wants to get DVDs,” said Hastings. “All the new releases are on DVD, the vast catalog is on DVD. When there is demand, it will make sense for us to meet that demand for streaming only.”
…But There is Demand for Streaming-Only
While that may be true – people do want the new releases – the demand for the physical media is arguably an artificial one created by the entertainment industry. Studios simply refuse to offer their movies and TV shows via Netflix’s on-demand streaming library until they’ve been able to pull in a nice profit from disk sales first. This, in turn, forces consumers to not only purchase but also desire the DVD-by-mail part of the Netflix service as opposed to a separate, unbundled option of on-demand content only.
In other words, to say that the demand for streaming-only doesn’t exist isn’t exactly accurate. After all, Netflix reported that their streaming stats are now at an all-time high with 42% of subscribers having streamed at least 15 minutes of one TV show or movie during the last quarter. This number is up from 22% during the same period last year. Considering that Netflix’s subscriber base itself has grown 28% over the past year, this figure means that the raw count of subscribers actively engaged in streaming has now more than doubled over last year. Hastings even said himself that the numbers were “a good marker of increasing streaming adoption.”
Although the demand for new releases would probably have many subscribers sticking with the hybrid DVD/streaming service, by forgoing a streaming-only option it seems that the company is overlooking an opportunity to pick up a sizable group of more casual users. There are likely a number of people who would appreciate the option to pay a little less in order to to gain access to the on-demand content only – content which includes a much smaller catalog than what’s available by mail. Given the company’s integrations into game consoles, set-top boxes and even some TVs, there’s actually no need to even own a DVD player anymore to watch Netflix movies. The content is on-demand.
Streaming media is the future, not physical disks. Hollywood knows this too, but as with the music industry, they’re fighting tooth-and-nail to keep the old business model afloat for as long as possible. So far, it’s working. As long as they control the method of distribution and keep it limited to physical media it will look like DVDs are what the people want. But the people really want streams. From music (Pandora, Spotify) to TV (Hulu, iPlayer) and yes, to movies via Netflix, streaming media is rapidly becoming the method of choice for many of today’s consumers. The future is an on-demand world and Hollywood would do better to figure that out now than try to delay the inevitable.
