Filmmakers Should Keep An Eye On Netflix

Since its founding in 1997, Netflix has stayed on the leading edge of market trends.  Over the last 22 years, Reed Hastings has taken the concept of movies by mail from nothing to about 36% of the movie rental market.  Netflix has driven subscriber growth and changed distribution by providing customers the convenience of never having to leave their home.

In recent years, the Company has identified emerging distribution channels and partnered with brands including Vizio, LG Electronics, Samsung, Microsoft and Sony, making it easier for subscribers to access Netflix content.   This month Netflix streaming service comes to the PS3 and in early 2010 Netflix will bring streaming service to the upcoming Wii HD unit as well.

So, what does this mean for filmmakers?

This means that filmmakers should keep a close eye on Netflix as it becomes an increasingly powerful distributor.  Traditional movie rental stores are dead.  And unlike the kiosk market, Netflix has built an engaged community.  The Company has detailed personal information including user preferences and viewing patterns that will allow it to uncover new opportunities that its competition simply cannot.

Netflix currently has 11.1 million subscribers.  According to Wedbush Morgan analyst Michael Pachter,  the Xbox deal has contributed about one million new subscribers to Netflix.  That equates to 7% of the 15 million Xbox units sold.  Assuming the same 7% conversion rate on PS3′s 9 million household units, Netflix will grow its subscriber base by 630,000 (roughly 6%) from the deal.

Netflix’s move to leverage the broad adoption of next-gen gaming consoles and use them as a distribution channel furthers the Company’s competitive advantage.  Though many complain about the lack of content available for instant viewing, as Hastings points out in the New York Times, “Our ability to license more content is based on what checks we can write… If getting on the PS3 [and Wii HD] helps our subscriber base grow, that helps us write bigger checks.”

Because licensing makes up nearly the entire cost of streaming, Netflix has resisted newer and more expensive content.  To date, I believe most of the deals have been bulk licensing and unlimited use agreements.  Going forward, Netflix can accelerate the growth of its instant viewing library if it is better able to directly offset the licensing costs of streaming content.  Because of this, Netflix would be smart to tweak the current subscription model and introduce streaming-0nly plans.

One thing is certain, as grows Netflix’s reach, so grows its power within the film industry.