Link: Netflix close to offering online movie downloads - Engadget - www.engadget.com.
A couple of thoughts/predictions on this new not yet launched service. You'll hear a lot of excited banter when this launches soon about this being Video On Demand. Actually, phase one of this will be better compared to a Video Download Service. Yes, NetFlix will need a set top box to make this service work and therein lies the problem. Everyone in this new space will need a se to enable the truly wow! "user experience" that launched NetFlix several years ago (+7 years ago to be exact). Another living room "box" is a very hard sell in the "killing fields of the living room floor". Even Tivo with it's wild popularity has had a very difficult time delivering it's set top box service at scale and profitability.
The Market?
Will this new service be primarily sold to their current customer base of +3 million? Though this would appear obvious it is unlikely a large % of these new service customers will come from the current base. The box alone should cost NetFlix around $100 per unit in today's china based hardware economics. This is not bad considering the average customer lifetime of a NetFlix customer today is hovering just north of 20 months and therefore the lifetime value of that customer is just under $300. But this also means that NetFlix can't give this box away for free. They are going to have to upcharge their current customers at least $9.99 per month to amortize the cost of the box (taking a real rough average that the average lifespan of their entire customer base is around 10 months currently this would allow them to breakeven on the hardware). We also know the market max pricing is around $12.99 per month for similar "service based offerings" (Tivo, etc). So the monthly additional service fee potential is going to be a tight range.
But the real question is whether their current customer base will pay another $9.99-$12.99 per month for the ability to use a download service requiring you to hook up a brand new box into your current home theater / cable / Tivo boxes and to use another remote control? Why would you when NetFlix already delivers their movies within 1-2 days and +90% of their customer base already has 1-3 movies sitting on top of their DVD player at any give time?
So, that leaves new customers who they are hoping to attract who haven't already joined the NetFlix craze and therefore will be competing with the Akimbo's and even Comcast Digital Cable's On Demand service. There clearly is a market here but in order to gain market share, it will have to be marketed in an historically successful way - but a way that current competitors curiously are not offering - thoughts on that in the next section - Marketing...
The Marketing
From a historical perspective, the most successful market penetration of new services like this have come in the form of "free hardware" with a contractual monthly service fee. Think of the early days of cell phones and satellite companies. The hardware in these offerings was always given away at an extremely low price and later "free" as long as one signed a 1-2 yr service contract. The more the hardware was free, the more the adoption soared. Notice, also how a 1-2 yr service fee guarantees breakeven on the hardware (1 yr) or better maps to the current customer lifespan (2 yrs).
This requires cash which Netflix has enough of - nearly 175 million in cash as of June 30, 2005. So, Netflix would be extremely smart to "lease" their box to new customers with the pricing of $9.99 per month for current customers (who are already paying another $9.99-$17.99 per regular mail monthly subscriptions). For new customers the offering might be $19.99 per month with a 12 month service contract ($240 lifetime revenue) or $14.99 with a 24 month contract (lifetime revenue of $360 per customer).
The Business Model
Lifetime Customer Revenue needs to be in the $250-$275 range. Hardware needs to be around $100. Content Costs need to be negotiated around $1.00 per download. The average customer will "rent"/watch 8-9 movies per month (~$100 lifetime (12 months)/~$200 (24 months). Content costs will remain the single largest expense of the Netflix model. Blend in other service related expenses and this leaves a similar profitability model vs the current Netflix model.
That's all for my current predictions until further information comes out....stay tuned.
Full Disclosure: I was one of the original six co-founders of the company in 1997 and led the charge for building all the financial and operational foundations (My Bio). I have not been in contact with anyone at the company in several years (I left the company in 1999).
