Netflix + Broadband = Watch Instantly, Even on Big-screen TVs

For Christmas this year, Liz Gannes, editor-at-large of NewTeeVee, keeping true to her affection for online video, gave me a subscription to Netflix (s NFLX). It came with an option to rent DVDs via mail and also stream videos directly over the Internet, either straight to my computer or to my big-screen television via a Samsung Blu-Ray DVD player. And boy, have I put that option to good use. In the past, I would typically use different hacks such as the Mac Mini plugged into the TV to watch some of these on-demand videos. Now, the easy integration of Netflix into the consumer electronics devices has made life a lot easier and simpler. Not to mention, there isn’t any cable clutter around my TV. I have been watching The Adventures of Sherlock Holmes, have caught up on Weeds and yes, I have also watched a couple of new films, though their names I don’t remember. In short, I am a prototype of Netflix’s future customer.

This claim can now be backed by data from The Diffusion Group, a Frisco, Texas-based research firm. It published a study today which points out that nearly “two-thirds of Netflix users that subscribe to a home broadband service are now viewing the ‘Watch Instantly’ streaming video service.” Furthermore, a third of broadband-enabled Netflix subscribers are watching this streaming video “exclusively only on their PCs, 8% view the content exclusively on their TVs, and 24% use both their PCs and TVs.” That’s matches pretty well with my experience and proves what Netflix CEO Reed Hastings told the audience of NewTeeVee Live last year: Netflix is the killer app for broadband.

I cut the cord more than three years ago, when we decided to launch NewTeeVee. Lately, it has become fashionable to cut the cable, so to speak. Instead of spending a hundred-odd dollars on cable TV, more and more people are using Hulu and on-demand video services such as Apple TV (s AAPL) and Netflix to get their video fix.

That said, it still isn’t a mainstream activity and it won’t be for a while due to the complexity involved with such set-ups. Which is why I think Netflix is going to play a crucial role in establishing a new video consumption habit. Michael Greeson, TDG founding partner and director of research, in a press release lists some reasons as to why Netflix is tasting success with its service, among them:

  • Netflix built a sizeable base of loyal service subscribers prior to launching its streaming service.
  • These subscribers had already demonstrated an ability to think beyond traditional content distribution schemes (e.g., renting a DVD at the local video store). In other words, they were predisposed to try novel, unproven methods of video delivery (in this case, online DVD rental).
  • Netflix was able to establish proof of concept by delivering streaming video to the PC before it tackled the more costly and uncertain issue of TV delivery (a market space littered with the corpses of well-intentioned efforts).
  • Though initially dependent upon a dedicated set-top box (Roku), Netflix moved aggressively to embed its streaming solution in a wide array of traditional CE platforms, thus reducing (if not eliminating) the consumer risk associated with trying an unfamiliar and unproven delivery scheme.

Such devices, plus the old-fashioned DVD-via-mail service, are helping to train consumers to embark on a new way of consuming video. And that strategy is working. The company said that 48 percent of its subscribers streamed content in the fourth quarter of 2009 vs. 41 percent in the third quarter and 28 percent in the fourth quarter of 2008. As a result, it expects to become one of largest studio/network customers.

I think of all the points made by Greeson, No. 1 and No. 4 are the primary drivers of Netflix’s streaming strategy. The service is embedded in most popular game machines, including Sony Playstation and Xbox, and more than a dozen televisions and DVD players. Several dozen TVs and other devices are going to follow soon. And that is what is going to help prevent Netflix from becoming the next Blockbuster (s BBI), Redbox (s CSTR) or whatever and in the process become the iPod of Streaming Video.

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