Five reasons Netflix may become the bargain bin of streaming services

Netflix Streaming

Netflix is the most popular “Internet subscription service for enjoying movies and TV shows” in the world. Historically, Netflix has been a forward-thinking company. It was first to the DVD-by-mail business 12 years ago, stealing a good chunk of Blockbuster Video’s customers. A few years ago it took that vision to a new level by launching an instant streaming service as its competitors laughed at the idea. It secured thousands of movies and TV shows and made its service available on almost every movie player, smartphone, set-top box, and video game console available. Since 2009, its subscribers have doubled from 10 million to more than 20 million today, and growing fast.

For the last decade, Netflix has been one of the savviest companies around, but does it have a plan for the next 10 years? Netflix is facing an onslaught of problems, any one of which could ruin the streaming company if it doesn’t have a counter-strategy. Does Netflix have a plan to float above, and remain the go-to service for all of your movie and TV needs, or will it drown in the sea of streaming content slowly rising around it? Here are five of the biggest challenges facing the king of streaming today.

Old, dated streaming content

People are flocking toward Netflix’s Instant Streaming service. Indeed, even Netflix calls itself an “Internet subscription service” now. Currently, it offers nearly 12,000 movies and TV show seasons, which is more than double the number of titles its newest competitor, Amazon, is offering. However, a good portion of this content is old, widely available elsewhere, or crappy (not well-recieved by critics or the market) — sometimes all three. Where it relates to content quality, I am speaking broadly, but the fact remains that Netflix does not get a majority of new DVD releases on its streaming service, nor can it stream the vast majority of archived movie and television content readily available on DVD.

New content is being added. Yesterday, Netflix signed a deal with CBS to add a number of older TV series including Frasier, Family Ties, Cheers, The Twilight Zone, The Andy Griffith Show, Medium (recently cancelled), Flashpoint, and Twin Peaks. Unfortunately, this deal doesn’t appear to include old or new seasons of current CBS hit shows like How I Met Your Mother, The Big Bang Theory, The Amazing Race, The Late Show, or any of the 20 CSI shows currently airing. The streaming company inked similar deals with Disney-ABC and NBC Universal. Few of these deals include new or current-season programming.

Netflix Selection

Save its major deal with Epix to stream select new DVD releases from Paramount, Lionsgate, and MGM, movie deals have largely been for archived content as well. Most major distributors seem willing to offer some major films on Netflix, but their selections seem random, at best. Hollywood has been hesitant to offer much of its premium content before it knows exactly how much it is worth. Netflix’s problem: Fresh content may be cost more than the streaming company can afford under its current business model.

Starz may be the first major content loss for Netflix. In Oct. 2008 Netflix signed a deal to stream Starz movies. The deal added about 2,500 titles to Netflix’s library, including the majority of its best offerings. Recent Starz movies added to Netflix include The Sandlot, The Karate Kid, The Fast and the Furious, Julie & Julia, and Pixar’s Up. However, the Netflix-Starz deal ends sometime in 2011 and Starz is going to want a lot more money for its content this go-round. Will Netflix be able to afford the possible billion dollar price tag (the price it paid for Epix content over five years)? If so, how many of these content deals can it truly justify? It will bankrupt the company to buy streaming rights to every title it currently offers on DVD.

DVDs are dying

Currently, the massive gaps in Netflix’s Internet Streaming service can be augmented by the more than 100,000 DVDs available in its DVD-by-mail library. In the DVD world, Netflix is still competitive. It gets DVDs about a month after they hit store shelves, but nearly every new TV and film release is available, as is almost every old piece of content you could imagine. But DVDs are on the outs. Sales are dropping steadily and consumers are consistently moving toward Internet downloading and streaming services instead of physical discs. It will not happen overnight, but DVD-by-mail is becoming a service few will bother paying for. Netflix itself has realized this trend; the company has been distancing itself from physical media, adding a streaming-only subscription plan for $7.99 last November.

While its reasonable for Netflix to abandon DVDs, those who opt for streaming-only are trading convenience for access to only 10 percent of Netflix’s content. Studies show that Netflix customers are very happy with their streaming services right now, but its likely that most of them haven’t tapped through the 12,000 or so streaming titles available. Over time, Netflix will lose out on business if it doesn’t find a way to make available the 90,000-ish movies and TV shows that are exclusive to physical media right now. There will always be people willing to pay to access a pool of movies, but many people will want to know that they’re favorite TV shows and movies are available. This pressure will increase as competitors emerge.

Poor promotion of available content

Movie collections: We’ve established that Netflix will need to bolster its library of stream-able titles if it hopes to become more than a bargain bin for old content. However, simply obtaining new movies isn’t enough. Netflix has no method for promoting new content. Sure, it has a “new releases” section and Starz has its own tab in browsers, but the company relies on the strength of its movie recommendation engine to do the majority of work for it. While it is a good engine, this is a mistake. Netflix needs to do a better job of promoting its premium content offerings. Currently, titles hit the “new releases” section for a while and then disappear into the fold. The Criterion Collection is a good example of content lost in the Netflix archive. The collection includes more than 150 classic films by renowned filmmakers including Jean-Luc Godard, Akira Kurosawa, Terry Gilliam, Luis Bunuel, Frederico Fellini, Wes Anderson, Alfred Hitchcock, and Charlie Chaplin.

Last week, the Criterion Collection abandoned Netflix for Hulu. Why? The company explained the departure in a Facebook post. “It has never been easy to find Criterion movies on Netflix — ‘Criterion’ is not even a searchable term there. Compare that with Hulu’s willingness to develop a whole area of their site around us, brand the films associated with us, and develop the capability to show many of our supplements alongside our films.”

Granted, the Criterion Collection is mostly a collection for film enthusiasts, but Netflix did not even have a proper profile page for it. Hulu offers a better value for content holders like Criterion. With Hulu, Criterion gets a profile page, can be featured in various sections of the site, can release clips, and can likely collect ad revenues for those who stream its content on Hulu or Hulu Plus.

Netflix SNL pageEpisodic TV: It gets worse. Because Netflix was built with DVDs in mind, it isn’t currently equipped to properly bundle TV shows. In its NBC deal last September, Netflix gained the rights to stream new episodes of Saturday Night Live a day after they aired. A quick check on the SNL Season 36 page of Netflix shows that this deal did indeed go into effect, but I’ve been using Netflix for months and never knew it offered new episodes of anything. Unless you search out SNL specifically and stumble into the Season 36 page, you would never know Netflix had new episodes of SNL. Because Netflix still groups all of its TV shows into seasons and doesn’t have pages for each episode, it’s impossible for the service to properly notify its users that a new episode has been added to the service. There also isn’t a proper landing page for all of Saturday Night Live. A search will bring you the option to show all of the seasons, but they are laid out like a group of DVDs. The Netflix DVD-display model works when looking at a bunch of movies, but it is ineffective when searching for episodic programming.

Netflix does have profile pages for movie stars like Alec Baldwin and other groups of films and shows, but they are only accessible on the PC version of the service (as far as I can tell). Hopefully it will find ways to further leverage collections of films and shows it already has. Why can’t users become fans of a particular director, writer, or movie star? This would greatly improve Netflix’s recommendation engine.

Hulu, a top competitor built around TV, has solved a number of these problems.

No model for premium content

Assuming Netflix can solve its problems with content promotion and episodic television, it still has no way to prove that it is a great place to promote new and premium films and TV shows. While a subscription-only service worked during the DVD-by-mail era, it may not be enough in the years to come. If Netflix wants to have more than bargain bin titles, it may need to invent new ways to bring in revenue for content holders.

Here are a few ideas:

Ads: Hulu offers a subscription service, but it also has a thriving ad-targeting business. Not all content needs to have ads, and the ads should be short and few, but users will put up with a few ads if it means getting new TV shows on Netflix.

One-time rentals: Apple TV offers new TV episodes for 99 cents a pop. Perhaps Netflix could charge a fee to rent certain TV shows or movies while they are in their “new release” phase. Of course, being that subscribers are already paying $7.99 per month, these fees should be cheap and there should be a universal window of time when many movies and TV shows enter the “free” zone.

Purchasing: Walmart-owned Vudu and Apple both offer digital movies and TV shows for purchase. Though I’m not keen on Vudu’s costly DVD prices ($19.99 to own a new movie), the idea is sound. There is currently no way to forever save a movie on Netflix. Often movies and TV shows pop up and disappear (example: Criterion titles). If users could buy a movie on the service for, say, $4.99, and have it forever (or perhaps download it for local use outside of Netflix), Netflix may get many more new releases.

None of these options will make current Netflix subscribers particularly happy, but if the changes were laid out in an affordable and explainable way, it may set Netflix up as the complete destination for streaming movies and TV. Perhaps the company is content being  a $7.99/mo all-you-can-eat buffet. Some people love buffets. I tend to be more selective and would rather pay a bit extra to get what I want. I don’t think I’m alone.

Amazon, Hulu, and the rise of the rest

Netflix was first to the game and is currently the biggest and (arguably) best streaming service. It has proven that people have an insatiable apetite for streaming content. A statistic was floating around late last year that Netflix alone accounts for about 20 percent of Internet traffic during prime time evening hours. The battle between Level 3 (Netflix bandwidth partner) and Comcast over who pays for Netflix bandwidth is proof that the service is immensely popular. However, the water is bubbling under the streaming giant. This week, Amazon unveiled that it’s Amazon Prime free-shipping service now includes unlimited streaming of more than 5,000 movies and TV shows for $79.99 a year. Though Netflix has a larger streaming library, a quick look at the two offerings show a remarkable number of similar movies and TV shows appear on both. Red Box has also announced plans to enter the instant streaming race. Will its all-you-can-eat buffet look the same?

Amazon On DemandAnd those are just unlimited streaming competitors. Netflix also has Hulu, Apple TV, Amazon OnDemand (now integrated with its unlimited streaming offering), Walmart’s Vudu, and Microsoft’s Xbox Marketplace, among others. These competitors are toying with different business models, something that Netflix has resisted.

The Post-Netflix World?

Last December, Whitney Tilson wrote a detailed article describing the problems facing Netflix. While we don’t completely share his dim outlook on the future, it is becoming clear that if Netflix wishes to remain the most popular Internet streaming service in the years ahead, it will need to revamp its platform and approach. Just as the e-book market has millions of free books, every movie and television streaming service will likely have thousands of cheap or free titles available. But the winners in this race will find ways to distribute the 90 percent of movies and TV shows that Netflix is currently ignoring.

This is an exciting time for film and television. Distribution is finally moving to the Web in a big way, new services are springing up every week, content creators are finding new ways to define success, and old media companies are being forced to adapt to the shifting sands beneath their feet. Over the last decade, Netflix has proven to be one of the most forward thinking companies in the world. But we wonder, is it thinking ahead now?

While I’m sure there are people who love to watch Striptease and BBC shows every day, I’d rather watch The Social Network.

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