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Published: Sunday, 11/28/2010

Netflix shifts emphasis to streaming, posing threat to movie studios

In a matter of months, movie delivery company Netflix has gone from being the fastest growing first-class mail customer of the U.S. Postal Service to the biggest source of streaming Web traffic in North America during peak evening hours.

That transformation - from a mail-order business to a technology company - is revolutionizing the way millions of people watch television, but it's also proving to be a big headache for movie studios, which increasingly consider Netflix a competitive threat, even as they sell their content to Netflix.

The quandary for Hollywood was neatly spelled out in a Netflix announcement last week of a new subscription service: $7.99 a month for unlimited downloads of movies and television shows, compared with $19.99 a month for three DVDs sent through the mail.

For studios that only a few years ago were selling new DVDs for $30, that is a huge drop in profits.

"Right now, Netflix is a distribution platform and has very little competition, but that's changing," said Warren Lieberfarb, a consultant who played a role in creating the DVD while on staff at Warner Brothers.

For the first time, the company will spend more over the holidays to stream movies than to ship DVDs in its signature red envelopes (although it is still spending more than half a billion dollars on postage this year).

Netflix has posted a Google-like rise, nearly quadrupling from its 52-week low in January.

With a market value of nearly $10 billion, it is worth more than some of the Hollywood studios that license movies to it.

In some ways, the closest parallel as a one-stop digital marketplace is iTunes, the Apple Inc. service that has put itself at the center of the digital world and has used that power to demand concessions from its suppliers.

Netflix now has more than 16 million subscribers.

It does not release information on the most popular films or TV shows that are streamed, but as a general rule, titles that can be streamed instantly are not fresh out of theaters or plucked from the current television season.

But movie studios increasingly view Netflix as a threat; they are considering a variety of ways to brake the company's growth.

They have pushed back on release dates, requiring Netflix to wait 28 days while studios pushed more expensive and lucrative sales of the DVD and on-demand versions on cable.

For now, Netflix has become a barometer of the consumer appetite for streaming movies: a recent study conducted by Sandvine, a broadband equipment maker, showed that Netflix accounted for more than 20 percent of all Internet download traffic in North America during peak evening hours.



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