The Evolution of Netflix

Netflix is aggressively positioning itself to become a leader in online video.  Strategic Partnerships with Microsoft’s Xbox, Starz, and the Roku player are expanding the platforms by which the Company’s content reaches subscribers.  As consumer viewing habits continue to change, Netflix’s streaming initiative provides these subscribers with options.  By embracing more avenues for content delivery, Netflix aims to increase the Company’s value proposition.  However, as the Company shifts focus from DVD to New Media, they seem to have forgotten one critical element… a business model.

Streaming service is currently a loss leader for Netflix.  As in the initiative continues to gain traction, it also continues to rack up costs.  Netflix needs to quickly implement a viable business model to turn this loss leader in to a money maker as it rapidly encroaches on a new breed of competition from companies like Hulu and the recently launched TV.com.  However, it is early in the game and Netflix is taking the right steps.  They have a number of options to generate revenues – from creating a streaming subscription, to revenue sharing, to advertising.

Perhaps the largest problem lies in the content itself.  With only 15% of the Company’s DVD inventory available for streaming, content is a major obstacle.  Netflix online success is hinged on movie studios providing the Company with distribution rights.  Joint partnerships like Hulu and TV.com have allowed Studios to keep all of the money.  Convincing them to grant rights is a difficult battle in which the terms will likely favor the studios.  The Xbox deals of the world are key in providing Netflix with leverage.  Because of this, I believe you will see more of those types of deals.  (Neftlix recently announced partnerships with television makers Vizio and LG at CES in Las Vegas.)