Will 'Free' Make Money for Netflix?

Netflix made a big splash today with their announcement of a $100 set top box, built by a California startup called Roku, that streams free movies (for Netflix subscribers) to the living room.

Good for them. Instead of wading into a losing battle over cheap downloads and rentals (see Vudu, BlockBuster (BBI), AppleTV (AAPL), Google, etc., which charge for each movie), they jump right to free. They know what the consumer wants.

Of course, the service isn’t really free. Users have to buy the $100 box, and continue to keep a Netflix subscription active ($18/month). There are 10,000 movies available on on the box, which is significantly less than the 100,000 or so titles on Netflix’s DVD mailing service (and it’s old titles, not new releases). But it’s also an order of magnitude more titles than are currently available on demand via Comcast (CMCSA), my cable provider. And just like Comcast and the other cable guys adopted Tivo’s DVR functionality into their boxes before Tivo (TIVO) could do much damage, look for them to eventually copy Netflix, too, and offer a much wider variety of on demand content.

Netflix is taking a big financial hit with this service, which originally launched via PC viewing only and has since expanded. Last year they said they were putting $40 million/year towards licensing and overhead costs.

But really, what choice do they have? BlockBuster is gnawing away at one side of their business (physical DVDs), while online services (and don’t forget BitTorrent) come at them from the other end. And now the cable companies will be focused on them, too.

It’s a wonder Netflix continues to flourish in such a hypercompetitive market. They now have over 8 million subscribers, 21% more than a year ago, and 32% gross margins on their core business. Those margins have decreased somewhat, what subscriber acquisition costs have also dropped from $47 to just $30 per new member. But as long as they continue to give consumers what they want, they’re at least in the game.

Look for more devices with Netflix built in, including one from LG, later this year.

Original post

Comments

[bobthenoob]

The "free" movie option is already available for cable subscribers. I have a free video-on-demand at Cox here in Las Vegas. In VoD, I can view thousands of movies available at HBO, Cinemax, Starz and other premium channels (available to current subscribers only) plus several other free channels for others that doesn't have premium channels. I can view movies anytime and can be fast-forwarded, paused or rewind like a dvd player. I also have HD VoD, though I have an HD cable box and can view HD channels, HD VoD is not included in the normal service and requires an extra subscription.

[seeksome]

Another losing proposition for NFLX you want to make buy AAPL.Buy your Apple stuff here below wholesale:seeksomething.com

[K. Lewis]

This appears to be smart business in a big picture not many are considering. This business segment, similar to music, is in flux and the endpoint is still unknown with no clear winner or even dominant market leader like Apple/iTunes. If Netflix want's to play through, they need to be in every channel rather the betting on one or two models. When customers invest in a content delivery channel, it's hard to get them to switch. If they can afford it, they're smart to spread their bet and subsidize the losers rather than jumping in late like Blockbuster or Microsoft.

[netflixuser]

You're wrong on the price for netflix subscription. Apparently $8.99 and up get the streamed video.

[TanToday]

Reminds me of the AOL cheap internet pipeline model.

One price, same net, lowest provider WINS!

Until they ALL go out of business.

You NEVER get rich, selling something for FREE. Business 101.

[scottybe]

Do we know that this content will be free forever? More likely this is a smart strategy to get the boxes in homes, then sell premium content for profit. Without a hard drive or large cache, however, I'm not sure how they can stream quality HD to most homes for several years, if not more.