When I began writing this column in April, I saw trouble ahead for Netflix (Nasdaq: NFLX). The company was still in the process of bouncing back from the Qwikster disaster and I was feeling vindicated for believing I had seen the fiasco coming.
For years, my thesis about the online video industry went something like this: Distributors are screwed. Companies that buy rights to TV shows and movies from studios to show to consumers online would struggle to turn a profit for a few reasons. The barrier to entry online was so low, anyone interested and well-financed enough could enter the market. Distributors would need access to popular programming at almost any cost--without it, there was no reason for viewers to stick around. And online, consumers were increasingly price sensitive because cancelling an online-video subscription was so simple.
Essentially, Netflix and companies like it would be caught between ever-increasing content costs and increasingly fickle customers. It seemed like a no-win situation.
But Netflix is winning. Its stock increased nearly 300 percent in 2013. Its CEO just got a $2 million raise. The company continues to attract new subscribers for its streaming-video business and it has extended its head start over the competition on original programming development and user-interface design.
How did I get it so wrong?
Fire up the new Netflix user-interface on a Roku 3 and it's obvious other online-video companies (and many traditional pay-TV networks) have a lot of front-end development work to do. Roku's standard interface isn't bad, but Netflix's app is far better and it encourages viewers to keep watching by automatically playing the next episode of the show 15 seconds after the one you were just watching ends. (At least, the app on my Roku does--you never know when you're being A/B tested with Netflix). The ability build that kind of software and make sure it works on a variety of devices appears to be harder to replicate than I had thought.
Netflix's original series also surprised me. I have not watched (or liked) them all, but they all have received significant critical praise, several industry awards and award nominations, and enough media attention to make sure that just about anyone in America with an interest in TV is aware of them. That's more than can be said of the original and exclusive series at Amazon (Nasdaq: AMZN) and Hulu. No matter how much you may have enjoyed "Misfits" it never reached the cultural ubiquity in the United States that Netflix achieved with "House of Cards." Now, as companies like Amazon are just beginning to develop their first original drama series, Netflix has a seemingly healthy pipeline of new exclusive shows coming from major studios in a variety of genres.
Meanwhile, Hulu Plus has a fraction of the user-base and revenue Netflix enjoys. New subscription services are struggling to get off the ground and in some cases giving up entirely. Though several new online storefronts have opened or expanded, none have seemed to generate much excitement with consumers or really differentiated themselves from each other.
And now, Netflix is taking its show on the road. The company told investors earlier this year that its international business could one day account for nearly 80 percent of sales.
But it's hard to let go of my thesis. Despite Netflix's success, the underlying conditions remain the same as they were in April. Competition is still coming from Amazon, Microsoft (Nasdaq: MSFT) and who knows who else. Content costs are still high. Netflix's push into new countries will not go uncontested. Its profit margin is slim.
What has changed is the distance between Netflix and its competitors. The greater that distance becomes the the less likely subscribers will be to flee the service if Netflix ever decides to raise its prices again.--Josh