Netflix has been growing like a weed for the past few years, because of several reasons:
- The death of movie stories like Blockbuster
- Lower pricing from Netflix
- Online streaming from Netflix that makes subscriptions a better value
- More devices like video game consoles capable of playing streaming videos
So when is that growth going to slow down? At an investor conference today, Netflix CEO Reed Hastings basically admitted that Netflix doesn’t really know. (And obviously, no one does.)
Speaking at the JPMorgan conference, Hastings described the company’s current state as being on the “front half” of an “S-curve” of streaming adoption: Growth has actually accelerated as Netflix has gotten bigger, because of streaming subscribers.
How long can that last? Hastings isn’t sure.
“In terms of having … insight about where the growth starts to slow down and de-accelerate, we can’t tell if that’s in one or two quarters or in 10 or 12 quarters. It’s probably somewhere in there.”
Live notes from Hastings’ Q&A follow. Unless in direct quotes, this is a paraphrased transcript.
9:56 Waiting for event to begin…
10:00 How big is this market? What is addressable market?
Reed: That’s a question we wrestle with also. DVD was $7-8b market. With streaming, stretches market definition. Anyone who has broadband clearly has the money and technology to be able to stream Netflix movies.
10:01 How does business cost structure look like in streaming world? Biggest savings is not having postage. It’s about $1 per DVD shipment, which goes down to about a nickel per stream. Difference between DVD is under copyright law, can go to Walmart, buy 1,000 DVDs, and rent them. That’s how we can have 100,000 titles, all the new releases, so if studios want to deal with us directly, terms are better. With streaming, we have to put enough money on the table to get them interested in working with us. What does it cost us? Certainly going to be higher than on DVD side, and it should be. So much savings from not having postage and handling. Not so much P&L list on content spending, measured in top line, which is, given our margin structure and operating margin goals, that’s how much we’re going to spend on content. For what we’re going to spend, can we get enough content to attract subscribers?
10:04 10 million subs with ACCELERATING growth because of streaming. Growth is actually accelerating. For last 5-6 quarters, growth accelerated every quarter. Some sort of S-curve of streaming adoption. Problem with being on front end is “where’s the back half” of S-curve. We don’t know. Fundamental tailwinds are quite strong: Broadband is growing, people like what we do, more content every year. But as for when growth starts to de-accelerate, we can’t tell if it’s 1-2 quarters or 10-12 quarters.
10:05 As you move into streaming world, what are strengths vs. HBO or VOD? Against direct competitors, breadth of content available on DVD is so huge, key asset against copycat style. Broad competitive landscape, a lot of substitutes. Buying DVD, etc. Value is a big differentiator. At $9 month, supplemental service. Despite cord cutting press, haven’t been able to detect anyone who subscribes to Netflix and doesn’t get cable — we don’t have sports, news, etc. Supplemental service. Very few people get supplemental and cut the basic.
10:07 You talked about 50% of subs use streaming. Amazon tells us some colour about how Kindle subs buy more books. For streaming world, are they consuming more content? First half of people who adopt anything are more aggressive about tech. Amazon example doesn’t really tell you much. Amazon is giving you some good facts, doesn’t tell you much. (Busted!) Some people use streaming only a little, some use it a lot. As broadband grows, as more people get their Internet hooked to their TVs, all of the obvious properties.
10:09 How does churn rate look for consumers who are streaming? Biggest driver of churn is “haven’t watched TV show or movie” from Netflix in a while. So yes, people who actively use the service churn less. But the key is to get people to use it more. In terms of streaming improving the churn rate, you can think of it like that, but the better the service gets and the lower the price, the better the value is and the more people want to keep it.
10:11 As we move ASP down from $15 to near $9, better value for more people. Market size thinking is we should be as low-cost as we can with this great service. Key thing, next big question is, if you look at streaming customers, are you seeing growth curve in streaming as DVD by mail? Similar, I mean, all S-curves are somewhat similar. Probably driven by different things. Back to the S-curve and thinking about our growth for the next two years, there’s this big tailwind we’re getting by the tipping point of video stores, which are closing. How much is that driving growth versus the attractiveness or streaming? Streaming growth will continue for 10 years, but only a few years left of video stores dying. Also the consoles coming on (Wii, Xbox, etc.) is helping drive growth. I think what we’re seeing is accumulation of all of these factors.
10:13 If Hulu, Youtube, and Netflix are growing at phenomenal rates, it’s probably no one thing we’re all doing.
10:13 You’re doing deal with 28-day windows. Have you seen impact on churn, usage? In the book market, there’s hardcover books that come out for a couple months, and paperbacks that come out at lower price. For studios it doesn’t work that way for DVDs. We’re trying to help studios create a sellthrough and premium rental market window. Only perceived option are to do pay per view where studios capture a couple of dollars or premium rental or DVD purchase. More value oriented options like Redbox and Netflix will be set back a bit. With that, we get better terms and more streaming content. So we see it as helping our initiatives and studios see it as helping. Streaming part of service is so much better. On balance, you see better churn.
10:16 Music market peaked in 2000, down 60% 10 years later. If we parallel that and say DVD is down half in 10 years, that’s a good metric. 40% or roughly half that still exists. Will go down in half every 10 years, when fixed costs overwhelm, fixed costs may run it over. 15-25 years for DVDs, hard to tell.
10:17 How aggressively will webcasts go to day-and-date? We’ve never been focused on new release business. That’s properly a low margin business. We do offer it, but we mostly focus on catalogue, using personalisation to create demand for products that didn’t have demand. That new release business is shifting to PPV, that’s fine for us. Most consumers don’t see a conflict in using Netflix, movie theatres, PPV, Redbox, etc. We don’t have most of new releases on streaming, so compatible that there are other services for that.
10:19 Upfront fee vs PPV. Nobody in our segment, whether HBO or cable networks, pays per view. Standards and practices are for fixed costs. If you want to be in new release business, that’s pay per view oriented. But standard for us is fixed cost.
10:19 PPV for a penny a view is fine. Question isn’t the form. Will studios continue to licence Netflix content at prices it can afford? We keep spending more money and getting more content. Key thing is how much money generated.
10:21 Why can’t cable do what we’re doing? They can, but they’re organised in regional monopolies. We have national footprint. Our service is more like Google mail and Yahoo mail versus ISP-specific mail. Our UX is better, merchandising is better. They have advantage of being connected already to TV. They have some advantages, we have some advantages.
10:23 To get HBO content, would cost a lot of money. (~$300 million a year.) Could you see the time when you’d want to get that content? Not in the near term. Economics are better to have Starz and to have people distribute the cost across cable and Netflix. We don’t need to get an exclusive licence. Our basis for competition isn’t when we have X movies and cable doesn’t have. So far as you know, we have some Showtime shows but not all of it, but no success yet with Epix or HBO.
10:24 Do studios get auditing for each view? No expectations around tracking. We’re like pay TV. Not much feedback.
10:25 What’s the churn curve? People try it out for a couple of months. Some people figure out quickly if they’re getting enough out of it to keep the fee. If you stay longer, churn is less.
10:26 In the summer, signups increase because people are indoors watching movies. Some people say for years, others come for three months, leave, come back, leave, etc. Acquisition cost is only $20, think of it more as general internet retail, versus something with huge setup fees.
10:28 What’s consumer experience like in digital media in 5 years? In interim, how much better has Netflix, Amazon, Apple gotten better in 5 years? That’s the rate of improvement we can continue. Amazon service, if you look at 2005, it’s much more primitive than today. Series of continued innovation. Big thing the internet brings to television and digital media is wide range of competition between different firms, user interfaces, etc. All firms borrow each others’ ideas liberally and improve. Much different from rate of innovation from traditional players, which have monopolies of sorts.
10:30 Someday, Xbox might use Natal to say, Gee Reed, you’re sad today, you want to watch this movie? You might be controlling your TV with your iPhone, talking to it, waving at it. You’ll consume video in many forms. All of this sort of stuff coming over 5 to 10 years.
10:33 I looked at study saying Netflix increased long tail demand ~80%. How is that growing? Do you look at that? One of chief competitive advantages Netflix has is data, would you let devs build on top of it? Long tail: Always from the beginning, we’ve focused on where we add value. That is matching people to content you love. People have very unique taste. If could help you find things you love, you’d watch more. It’s a matching problem. Using data, I don’t want to rule anything out, there’s a lot of privacy rules (and special laws) around video content, I don’t think we’ll be at the forefront of any of that, but we are building huge database for at least entertainment video.
10:35 Technical difficulties — the webcast just dropped out. We’ll try to reconnect.
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