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Summary:

We’ve written a lot about how we like Netflix’s approach to streaming content to your TV. The company’s decision to partner with hardware companies instead of building its own box was a smart one that positions it for life after rent-by-mail DVDs. But that wasn’t always […]

We’ve written a lot about how we like Netflix’s approach to streaming content to your TV. The company’s decision to partner with hardware companies instead of building its own box was a smart one that positions it for life after rent-by-mail DVDs. But that wasn’t always the plan. The Wall Street Journal has a big piece on Netflix today that talks about how the company arrived at its current strategy — and how much it could be costing Netflix just to keep the content flowing.

The Journal writes:

After Netflix introduced its streaming service, Mr. Hastings assembled a team that came up with a prototype — a small, square metallic box that would access the Web through a consumer’s broadband connection, let viewers navigate a list of Netflix movies by remote from their couches, and sell for under $100.

But Netflix pulled the plug shortly before it was to be unveiled to the public, with company execs fearing that a Netflix-only service wouldn’t fly with consumers. The project was given to startup Roku, which sells a small, square box that puts Netflix streaming content on televisions for $100, but with Amazon VOD, and other partners to come.

While the box may sell for just $100, keeping content piped in costs considerably more. An unnamed source tells the Journal that Netflix spent roughly $100 million last year to license titles for its streaming service. To put that in perspective, if true, that $100 million got Netflix around 12,000 back catalog movie titles and TV shows. While the service’s offerings are getting better, Netflix will need to cough up some more money to get movies out of the so-called “HBO hole,” which locks up the exclusive rights to films for pay TV channels. Netflix has floated the notion of charging a premium for this content, but hasn’t formally announced any intention to do so.

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  1. Let’s run the numbers: $100million sounds like a lot of cash but:

    divide by $8.99/month (base plan cost) to get a worst case 11,123,470 months to pay back the $100 million.

    divide that by 12 to get the number of subscribers needed in a year pay back that $100mill- 926,955

    with over 10 million subscribers, they’ve got that $100 million streaming cost more than covered.

    It goes to show you how this type of business scales quite nicely.

  2. I am no expert on this, but it seems like you are missing one pertinent fact. That Netflix subscriber fee also needs to pay for their base business of acquiring, storing, handling and shipping physical DVD’s. Oh – and not to forget all the advertising they do in physical and digital forms. So, I am not quite sure the numbers are quite as solid as one would think.

  3. Just check out their profit numbers. I think they’re doing just fine.

    The beauty of moving their entire operation to silicon and electrons is that the cost of processing approaches zero. No more handling, shipping and storing of physical media.

  4. The box was given to Roku along with a few dozen employees and a multimillion dollar investment.

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  6. Chris Albrecht Tuesday, June 23, 2009

    Uhh, Dave. The Roku box isn’t METALLIC. Sheesh.

  7. Trust me, I know. It’s an ugly little plastic thing made from off the shelf parts no doubt. However, the concept, employees, and millions of dollars were transferred/invested to/in Roku with Anthony Wood reclaiming his CEO position and vacating his Netflix VP position. I’m just sad their very nice Soundbridge product seems to have been abandoned.

  8. The biggest streaming box in the next few years will be the Wii if Nintendo North America will get off its ass and allow Flash 9 support to for the Wii either via Wiiware or the Wii Internet Channel .

    Nrtflix have been asking thier customers if they would like a Netflix Wii Channel recently and a few other content agregators like Joost have been investingation alternative platforms like games consoles .

    With the Wii’s reach and place in living rooms in many households Nintendo could be on a potential goldmine if they licence and revenue share with content aggregators .Nintendo Japan sees the value of streaming video and now has two video on demand challes in demand one of which is a WiiWare title .

  9. Does the Wii have enough horsepower to do video? What about HD support?

    I’d question it’s viability as a video platform for anything other than low bandwidth low resolution video.

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