How the Assault on Netflix Will Shake Out

Anthony Freda

With Facebook and joining the streaming media fray, the current issue of The Hollywood Reporter magazine looks at the increasingly fierce competition.

The following article appears in the current issue of The Hollywood Reporter magazine on newsstands now. Subscribers can click here to read this issue.

If imitation is flattery, then Netflix should feel rather charmed lately, because the company’s aggressive push into streaming TV shows and movies over the Internet is being copied by, well, everybody. The latest entry, Facebook, has begun streaming Warner Bros.’ The Dark Knight to any of its 600 million users who fork over $3.

Flattery, though, doesn’t pay the bills. And its investors have begun to worry that streaming media to voracious consumers who have tired of round trips to the video store is a relatively easy business to replicate nowadays. That can’t be good for Netflix. After all, it seemed like just yesterday — or at least a couple of weeks ago — that Netflix was enjoying exclusive hegemony over the market. So far this year, 61 percent of all movies streamed or downloaded are done so through Netflix, according to NPD. Comcast is second with 8 percent. The dominance is more stark when one considers that Netflix doesn’t even offer downloads, just streaming.

"We have said for a long time that a big, growing market attracts competition," a Netflix spokesman acknowledges.

No wonder Facebook’s Dark Knight announcement March 8 spooked investors who viewed it as the social networking giant’s opening salvo against Netflix. Facebook is scary big, so Wall Street traders sent Netflix stock down 6 percent. Two weeks earlier, said it would stream unlimited movies and TV shows free to subscribers of its Prime discount-shipping service, and Netflix shares dropped 6 percent on that day as well. The two days lopped $1.4 billion from Netflix’s market cap, though it has since gained much of that back.

Practically daily, in fact, one studio or another is doling out a portion of its library to one of the big players or some upstart. Studio execs who are crafting such deals are trying to strike the perfect balance: big enough to profit from the digital gravy train but small enough so as not to cannibalize their DVD businesses. The newest entry to digital distribution came March 9 when Fandor launched with 2,500 independent films that it will stream to subscribers who pay $10 a month.

Fandor joins a long list of companies that hope to dethrone Netflix — or at least survive amid its dominance — by streaming premium TV and movie content: among them, iTunes, Amazon, Hulu, Best Buy’s CinemaNow, Walmart’s Vudu and bankrupt-but-still-operating Blockbuster.

Google’s YouTube might eventually get its act together and develop a meaningful alternative to Netflix, just as Facebook is already planning its next move after its Dark Knight experiment with Warner Bros.

That there are so many options is a testament to the popularity of streaming, which has become a preferred way to consume movies, according to a March study from PricewaterhouseCoopers. PwC reported that the Netflix model of mailing DVDs is No. 1 with consumers, with 43 percent of Americans doing it, while the subscription streaming service where Netflix also is dominant is No. 2 at 32 percent. Third is a la carte streaming, fourth is renting a DVD from a kiosk, and fifth is renting from a video store.

The Digital Entertainment Group recently said that while sales and rentals of DVD and Blu-ray discs in the U.S. dipped 6 percent to $16.3 billion in 2010, digital sales and rentals rose 19 percent to $2.5 billion.

Even niche streaming site Mubi, which focuses on independent, international and classic films — and now boasts 1.2 million  members — is adding 10 new users to its site every minute, CEO Efe Cakarel says.

All the competition for a slice of the fast-moving streaming-video business can be a boon to the studios that suddenly have more bidders for content, but it can also confuse consumers.

But the streaming entrepreneurs say choice is an advantage to consumers. Just as there are a variety of film festivals, movie studios and exhibition chains, so should there be a wealth of streaming sites.

“The future of VOD is a series of channels of content,” Cakarel says. “DVDs will continue their rapid decline as the choice of format for home entertainment. I think we all need to wake up and smell the coffee. My young sister in Istanbul will never buy a DVD in her life. That’s a fact. Period.”

Another fact, at least as Cakarel sees it, is that Facebook isn’t destined to be a major player in streaming premium video, judging from his experience four years ago when Mubi became the first company to stream movies on Facebook but then abandoned the effort.

“We very quickly determined Facebook was not a platform that encourages the kind of longform engagement and attention required to watch a feature film,” he says.

Naturally, there are dissenters. "On a longer-term basis, we think that Facebook could become a credible threat as its video business evolves," Goldman Sachs analyst Ingrid Chung says. Fandor board member Chris Kelly, who was employee No. 25 at Facebook, is just as convinced that his former employer will be a "major player" in streaming premium content. “Some have embraced the notion of inventing the Facebook of movies,” Fandor vp Jonathan Marlow adds. "We realized Facebook was the Facebook of movies."

One reason for the Fandor execs’ confidence is that social networking — getting Facebook friends to recommend movies to one another — has become a terrific way of marketing a film, so it’s only natural the platform should be used for watching them as well.

Fandor piggybacks on Facebook’s ability to build communities by letting fans send 60-second clips of their movies to friends via the BlipSnips social video tagging service.

Sharing clips is becoming a business unto itself, in fact. A company called AnyClip recently inked a deal with Universal whereby many of the studio’s movies will be reduced to a series of short clips for Internet users to share and post on their blogs and Facebook pages. The clips include call-to-action links, like ones to Netflix or Amazon or other places where consumers can spend money that will find its way into Universal’s coffers.

Sony Pictures Home Entertainment also recently created a My Daily Clip app that sends out a new scene from a Sony movie every day and then sends you to iTunes to buy the film.

While the jury’s out on Facebook’s streaming initiative, it’s a given that studios need to replace falling DVD revenue.

“It’s just not clear why you should have a room in your house dedicated to DVDs,” Kelly says. “It should be stored out in the cloud and streamed into you as you want to see it.”

By 2014, revenue from on-demand will surpass that of revenue from DVD and Blu-ray discs, predicts Lionsgate digital chief Curt Marvis, who pioneered the movie site CinemaNow in 1999.

But studios are also terrified of the trend toward renting streaming media rather than purchasing it. Consumers wonder why they should buy digital movies for what they’d pay for a physical DVD that is loaded with extras. To sweeten the digital deal, Sony has introduced some enhancements: a search function that uses facial recognition and speech-to-text software; Clip & Share, allowing viewers to share clips on Facebook and Twitter; and an interactive music playlist that links to movie scenes and the iTunes Store.

"We are trying to take advantage of the digital platform to provide an enhanced experience," says Rich Berger, SPHE senior vp digital. "We think this makes it more collectible."

Beyond sale-enhancement experiments, what the studios are looking toward is UltraViolet, a service launching this year. You buy a movie digitally, and it is stored in a locker that resides in the so-called "cloud." It could replace DVDs as thoroughly as music downloads have replaced CDs.

UV is being built by the Digital Entertainment Content Ecosystem, a consortium of more than 60 leading companies. DECE’s members include most major studios, LG, Samsung, Microsoft, Best Buy and even Netflix.

UV’s key is in making the purchase and storage of digital media as easy as buying a DVD and throwing it on a shelf — no complicated rules and access to your library wherever there’s an Internet connection. Down the road studios should even be able to blast updated digital extras to movies that are stored in the cloud so they can make the claim that the cloud doesn’t diminish the value of your collection, it enhances it.

One challenge for UV: Disney and Apple’s iTunes have not signed on. But if UV can persuade movie lovers to purchase some of their favorite films digitally rather than merely rent them, studios can worry a lot less about a DVD industry that has been shrinking for four consecutive years.

In the meantime, Netflix may be facing the barbarians at its own gates. The company didn’t make CEO Reed Hastings available for this report, but a representative responded to e-mailed questions. Asked about Netflix’s strategy for dealing with new competition, a spokesman said, “Netflix will continue to add content, improve the user interface and personalization to make TV show and movie choosing easier, and continue to add devices for streaming TV shows and movies from Netflix — and make the use of those devices easier and easier.”

That should calm nervous investors. Maybe.

Carolyn Giardina contributed to this report.

STREAMING PLAYERS: A comparison of current and newly-launched services.

News: iPad 2 went on sale March 11 for $499 and up. An estimated 500,000 sold on Day 1.
CEO: Steve Jobs, Apple CEO
Price & Terms: $1.99-$2.99 to own TV episodes; films start at $9.99. Rentals: 99 cents (TV), $4.99 (movies)
Streaming Content: 69,000 TV episodes and 12,000 movies
Analyst Comment: “What I’d like to see is Apple buying Netflix” — Brian Marshall, Gleacher & Co.
Devices for Watching on TV: Apple TV
Number of Users: n/a
Achilles Heel: Apple TV, which CEO Steve Jobs once described as a “hobby,” has yet to catch on with consumers.
Market Value: $318 billion (Apple Computer)

News: Warner Bros. will let Facebook users stream The Dark Knight; other titles might be forthcoming
CEO: Mark Zuckerberg, Facebook creator/CEO
Price & Terms: $3/title for 48-hour window
Streaming Content: The Dark Knight
Analyst Comment: “Letting WB offer some movies from a Facebook page is a far cry from Facebook launching a subscription service.” — Barton Crockett, Lazard Capital Market
Devices for Watching on TV: n/a
Number of Users: 600 million
Achilles Heel: It probably makes more sense to market a movie on Facebook than to watch one where, in the near term, anyway.
Market Value: $65 billion

News: Netflix reportedly outbid HBO for David Fincher’s $100 million-plus TV debut, the original series House of Cards.
CEO: Reed Hastings, Netflix CEO
Price & Terms: $7.99/month for unlimited streaming
Streaming Content: 8,300 movies and 24,000 TV episodes
Analyst Comment: “The company is well positioned to benefit from additional subscriber growth driven by streaming as well as international expansion.” — Edward Williams, BMO Capital Markets
Devices for Watching on TV: Roku, Apple TV, TiVo, Google TV, PS3, Xbox 360, Nintendo Wii, several HDTV sets and Blu-ray players
Number of Users: 20 million subscribers
Achilles Heel: If the cost of bandwidth rises — through usage-based pricing, for example — Netflix profit margins will shrink.
Market Value: $11 billion
News: Subscribers to Amazon Prime, the company’s discount shipping service, will get free streaming movies.
CEO: Jeff Bezos, CEO
Price & Terms: $79/year for Amazon Prime. A la carte movie rentals $2.99; TV episodes $1.89
Streaming Content: 90,000 movies and TV episodes available a la carte. For Prime subs, 1,600 films, 4,000 TV episodes
Analyst Comment: “Offering streaming movies to Prime subs is a new hook for acquiring highly profitable customers.” — Tony Wible, Janney Capital Markets
Devices for Watching on TV: TiVo, Roku, connected TV sets and Blu-ray players
Number of Users: 4 million Prime subs
Achilles Heel: Marketing has been a challenge, the proof being that Amazon has been through four different names for its streaming services.
Market Value: $74 billion

News: The normally free Hulu launched Hulu Plus premium subscription service on Nov. 17
CEO: Jason Kilar, Hulu CEO
Price & Terms: $7.99/month for unlimited streaming. Traditional Hulu: Free
Streaming Content: 29,700 TV episodes and 13,500 movies on Hulu; 16,000 TV episodes, 775 movies on Plus
Analyst Comment: “Hulu brings with a clear must-buy status among brand advertisers that we believe Yahoo is at risk of losing over time.” — Jordan Rohan, Stifel Nicolaus
Devices for Watching on TV: Blu-ray players, PS3, Xbox 360, Roku, TiVo
Number of Users: 30 million Hulu
Achilles Heel: Even the 1 million Hulu Plus subscribers must watch ads.
Market Value: $2 billion

News: The company launched its service March 9
CEO: Dan Aronson, Fandor CEO
Price & Terms: $10/month for unlimited streaming
Streaming Content: 2,500 independent films
Analyst Comment: n/a
Devices for Watching on TV: Boxee
Number of Users: n/a
Achilles Heel: Content is similar to Mubi, a more established player.
Market Value: n/a

News: n/a
CEO: Edward Lichty, Vudu GM
Price & Terms: 99 cent-$5.99 HD film rentals; pruchase for $4.99-$24.99
Streaming Content: 17,000 movies, many in HD and available day-and-date with DVD release
Analyst Comment: “If Walmart really wanted to get into the space and was serious, they would by Netflix and hit the ground running.” — Dan Rayburn, Seeking Alpha
Devices for Watching on TV: Boxee, Blu-ray players, PS3
Number of Users: n/a
Achilles Heel: Parent Walmart has already abandoned a DVD-by-mail product, a kiosk service and previous streaming service.
Market Value: $185 billion (Walmart)

News: Will soon be available on connected TV sets and the iPad.
CEO: Efe Cakarel, Mubi CEO
Price & Terms: $3/film rental or $12/month for unlimited streaming
Streaming Content: 2,000 independent, international and classic film titles
Analyst Comment: n/a
Devices for Watching on TV: PlayStation 3
Number of Users: 1.2 million
Achilles Heel: It fills a niche, but so far has few titles.
Market Value: n/a

News: The bankrupt company will be auctioned off as early as April
CEO: James Keyes, Blockbuster CEO
Price & Terms: $3.99 movie rental or $21.99 movie purchase
Streaming Content: n/a
Analyst Comment: “While brick-and-mortar video rental share has dropped to 22 percent as Blockbuster and Movie Gallery close locations, Redbox gained 9 points market share.” — Jeff Rath, Canaccord Genuity
Devices for Watching on TV: n/a
Number of Users: n/a
Achilles Heel: Bankrupt company won’t disclose how many of its 47 million customers are streaming.
Market Value: $300 million

Best Buy CinemaNow
News: n/a
CEO: Brian Dunn, Best Buy CEO|
Price & Terms: $2.99-$2.99 for film rentals; buy for $9.95-$15.95
Streaming Content: 10,000 movies and TV episodes, including some that may be streamed one day after airing
Analyst Comment: n/a
Devices for Watching on TV: Connected TV sets and Blu-ray players
Number of Users: n/a
Achilles Heel: Parent Best Buy didn’t even mention CinemaNow in its latest annual report. Is that a lack of enthusiasm for the brand?
Market Value: $12 billion (Best Buy)

News: Microsoft has been trying to squash rumors that it would soon abandon its Zune. As a brand, it’s likely Zune will disappear, say insiders, through the service will remain.
CEO: Steve Ballmer, Microsoft CEO
Price & Terms: $4 film/; $2/TV episode, $2 for 24-hour streaming rental; buy movies for $14.99
Streaming Content: Major movies and TV episodes from a variety of sources, but Microsoft won’t share numbers.
Analyst Comment: “Does anyone know if the Zune is really dead or alive? This gizmo is the Abe Vigoda of portable media players.” — Rick Aristotle Munarriz, The Motley Fools
Devices for Watching on TV: Xbox 360 Live, Zune player HDMI A/V docking station connected to an HDTV
Number of Users: n/a
Achilles Heel: Tough to get consumers excited about a product that’s being viewed as in limbo.
Market Value: $213 billion (Microsoft)