Can the Netflix Business Model Work Long-Term?

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It’s looking more and more that Netflix is just the second coming of Blockbuster. Netflix’s Internet video service furiously adding additional marquee titles as it braces for an even more competitive threats- this time from cable-TV provider Comcast.

In an effort to offer more exclusive material, Netflix secured the right to show “The Artist” plus other movies of Weinstein Co. prior to the films being released to leading pay-TV channels such as Showtime and HBO.

Ironically, the Netflix business model change came just a few hours after Comcast unveiled plans to undercut Netflix with a less expensive version of a stream service. This service will stream to devices with high-speed Internet connections. It’s $5/month to Comcast subscribers vs. $8/month for Netflix’ similar service.

Although it appears Netflix’s library is more extensive, Comcast’s Streampix could be good enough for a significant portion of Netflix subscribers. As Clayton Christensen professed in his landmark book The Innovator’s Solution, when markets become over-served, a good enough offering can become a disruptive innovation.

It may be too early for the on-demand video market to become over-served, but low-end competition from an entrenched, well-funded competitor is only bad news for Netflix’ business model.

Comcast, which is based in Philadelphia, will join two other large companies, Amazon.com Inc. and Wal-Mart Stores Inc., already offering video streaming services. Earlier this month, Verizon Communications Inc. announced that it is teaming up with Redbox’s DVD rental-kiosk network to introduce an Internet video service later this year. The pricing for the Verizon-Redbox business model hasn’t been disclosed.

Netflix, which is based in Los Gatos, Calif., also offers a DVD-by-mail rental service. But that has been losing millions of customers in recent months as the company has intensified its focus on the streaming business model.

Netflix CEO Reed Hastings has said that he views cable TV as his company’s biggest worry. So far, Hastings has identified Time Warner Inc.’s HBO channel as Netflix’s toughest competition, but that might change if cable providers such as Comcast can develop a compelling service.

By countering Netflix, Comcast hopes to hold on to customers, many of whom have been canceling their cable subscriptions to save money. Some of those former subscribers have been able to get their entertainment fixes from Netflix, whose Internet streaming service began this year with 21.7 million U.S. subscribers.

Comcast, by contrast, had 22.3 million video subscribers after losing 459,000 customers last year.

Based on the line-up included in Tuesday’s announcement, Streampix will duplicate much of the videos already available on Netflix. The list of overlapping selections includes the past seasons of popular TV series such as “The Office” and “Lost” and older movies such as “Brokeback Mountain” and “The Big Lebowski.”

Recently, Netflix has been trying to differentiate itself by buying the rights to many original series — a business model that has worked well for HBO and Showtime.

The licensing agreement with Weinstein marks another step in Netflix’s push to hone its competitive edge. Getting the streaming rights to quality programs such as “The Artist,” which is nominated for 10 Academy Awards, also may help Netflix keep its subscribers happy as other popular selections disappear from the service’s video library. Netflix will lose the rights to stream many movies from Walt Disney Co. and other studios when a three-year licensing deal with the Starz Entertainment channel expires next week.

The Weinstein agreement will give Netflix some movies within a year of their release in movie theaters. Besides “The Artist,” the deal covers foreign-language movies, documentaries and other films in the Weinstein vault.

Do you think the Netflix business model is on track?

Republished with author's permission from original post.

Jim Muehlhausen
Aside from his books "The 51 Fatal Business Errors and How to Avoid Them" and "Business Models for Dummies," Mr. Muehlhausen has been published in various publications including Inc., Entrepreneur, The Washington Post, MSNBC, The Small Business Report, The Indianapolis Business Journal, Undercar Digest, Digitrends, and NAICC Journal.

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