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Summary:

Netflix (NSDQ: NFLX) announced its Q3 2010 earnings a few weeks back and the numbers were every bit as positive as people have expected. The…

Netflix
photo: AP Images

Netflix (NSDQ: NFLX) announced its Q3 2010 earnings a few weeks back and the numbers were every bit as positive as people have expected. The company added nearly 2 million subscribers in the quarter, almost four times as many subs as they added the same quarter last year. Yeah, four times as many. While Comcast (NSDQ: CMCSA) and Time Warner (NYSE: TWX) announced net subscriber losses. At the same time, the cost for Netflix to acquire a customer has fallen 26 percent in the past year. Funny how when you digitize the customer relationship and the product at the same time, all your costs go down.

The number I always wait for from Netflix is the percent of subscribers that used Netflix Watch Instantly in the quarter. It rose to 66 percent this quarter, up from 64 percent in Q2. And remember, this was while adding 2 million new subscribers, which means that new subscribers are adopting Watch Instantly at a rapid rate instead of waiting to get used to Netflix; in fact, they’re probably joining Netflix just to watch instantly. This is, of course, why Netflix will likely offer a digital-only plan that subscribers can pay for if they don’t even want to pretend to put DVDs in their queue.

Why is this important today? Because it was just now that I finally dug through the summary financial results to find this gem of a quote, something that was briefly reported when Netflix announced its results, but was not fully understood in most of the reports I read. I want to resurface it because this is a big deal:

“In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD. With that transition in the business from mostly DVD to mostly streaming, this will be the last quarter the company will report this metric.” (emphasis mine, quoted from page 2 of this financial summary)

In other words, if you are a Netflix customer on a four-DVD plan and you churn through those DVDs at a rate of one a week, you’re watching about eight hours of DVD content a month from Netflix. To beat that in digital, you have to watch at least two hours of streamed video from Netflix a week. That two-plus hours is coming from somewhere. Is it coming from YouTube? Unlikely. Given how much of Netflix viewing is happening on an Xbox 360 or other living room device (according to some of my ISP clients), Netflix Watch Instantly represents the first IP-delivered video source that is competing directly with linear television, on the television screen. With this going on, how cute is it that the industry is instead concerned about whether Hulu video shows up on a few Google (NSDQ: GOOG) TVs?

Here’s what this means: Netflix is now a digital video streaming company first that happens to also offer DVDs by mail. The percent of subscribers that watch instantly is no longer just material to the business, it is the business. This should not come as a surprise, after all the company is named Net-flix.

James McQuivey is an analyst at Forrester Research, where he serves Consumer Product Strategy professionals. James blogs here.

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This article originally appeared in Forrester Research.

  1. Well that’s all well and good but try watching Scott Pilgrim tonight on Netflix “digitally.” Not possible. I can rent it in HD on demand right now.

  2. Chris Krerowicz Tuesday, November 9, 2010

    yeah…but all but one of the major movie studios are with BLOCKBUSTER VIDEO…allowing a 28-day window before your beloved Netflix and Redboxes can get their greasy palms on them…lol you guys…think trends 5 years from now…if you are a real marketer you will realize that Netflix will have fizzled by then as the revolution of getting off the couch begins…mark my words kiddies…as people finally wake up from their MEDIA COMA’s…we will see a shift into the realm of supporting LOCAL…we are all about buying LOCAL now…but as BLOCKBUSTER is lacking to point out…everytime you use Netflix and/or Redbox…you are supporting nothing locally…You are giving your money to someone out of state or even out of country…Local video stores still pay taxes and employ local residents…

  3. Josh Pritchard Tuesday, November 9, 2010

    …And management is bleeding the company’s finances dry to make this transition. Cashflows for Q3 were down to $7.8M on more than half a billion dollars in revenue. And now all of the management is selling stock — please check it out for yourself.

  4. While streaming beats discs, it loses to downtime:
    http://changingway.org/2010/11/09/netflix-streaming-beats-discs-but-loses-to-downtime/
    I started the above-linked post while Netflix was down. To be fair, it was back up a few minutes later.

  5. Nomo Blockbuster Saturday, November 13, 2010

    Blockbuster is anything but successful despite this 28-day window. It simply is irrelevant to the average consumer and Blockbuster fails to acknowledge its own imminent demise.

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