Netflix's Breakout Move

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A deal with LG to stream movies to TVs puts it up against Amazon and others in a race for what many predict will be a multibillion-dollar download market
by Cliff Edwards



In the high-stakes race to get downloaded video onto consumers' TVs, Netflix (NFLX) may have just pulled ahead. On Jan. 2, the mail-order movie rental company said it struck a deal with consumer-electronics maker LG Electronics to develop and market a set-top box that would let Netflix users stream movies straight to their TVs.

The service, expected to roll out by fall, comes amid reports that Apple (AAPL) is on the verge of unveiling (BusinessWeek.com, 12/28/07) its own video download service.

Digital Delivery Competitors Aplenty
The partnership with LG would expand on a program implemented by Netflix, about a year ago, that lets customers stream movies to personal computers. Netflix said in August that customers had watched some 10 million movies and TV shows on their PCs. But the Los Gatos (Calif.) company says most subscribers prefer watching long-form content on a big screen and hopes to cut the computer out of the equation altogether.

\"It's been wildly successful for the under-25 crowd that lives on their laptops,\" Netflix CEO Reed Hastings says of the PC download program, which includes some 6,000 of the company's 90,000 titles. \"We've been working with various partners on extending that to the over-25 crowd,\" Hastings said in an interview with BusinessWeek.com.

The LG-Netflix announcement is the latest in a race among companies to capitalize on what many analysts predict will become a multibillion-dollar download market. Technological advances and shifting consumer attitudes are forcing many companies involved in movie distribution to include online content delivery. The majority of U.S. homes now are wired to the Internet with superfast broadband access, while the price of digital delivery is dropping rapidly.

Last summer, Amazon.com (AMZN) and TiVo (TIVO) launched a partnership to let owners of TiVo digital video recorders purchase or rent movies and TV shows from Amazon's Unbox video download service. In August, Movielink, an online on-demand movie service backed by major movie studios including Universal, Paramount (VIA), MGM (MGM), and Warner Bros. (TWX), was acquired by Blockbuster (BBI). And startups such as VUDU and MovieBeam have rolled out their own set-top boxes with movie studio backing.

A Race of False Starts
Cable and satellite providers also have been stepping up their own on-demand and pay-per-view services to keep customers from defecting. Comcast (CMCSA), the nation's largest cable company, recently said its customers will be able to purchase and download many movies the same day they are released to DVD.


Until now, none of the upstarts has been able to break cable and satellite's dominance. Consumers generally have been reluctant to buy an additional set-top box, as many of the services require. And potential customers also have been turned off by download plans that place time restrictions on viewing and pricing terms that often cost more than physical rentals or purchases. The market remains so unsettled that retailer Wal-Mart (WMT) on Dec. 21 pulled the plug on its video download service a little over a year after announcing it.

Netflix and LG executives declined to offer details on their streaming service, pricing of the set-top box, or its configuration. Analysts say the set-top box and service could wither unless it also replaces a consumer's cable set-top box and includes a digital video recorder. Half of all U.S. households will have a digital video recorder by the end of 2010, according to Forrester Research (FORR). \"In a sense, they are late to the game, where DVR functionality has become the mainstream method for content delivery,\" says Creative Strategies analyst Tim Bajarin.

Blockbuster's DVD Play
One of Netflix's biggest challenges will be contending with Apple. Consumers generally have shunned Apple TV, the set-top box introduced last year by Apple, in Cupertino, Calif. That could change if reports pan out that Apple will announce a video rental service at the mid-January MacWorld Conference and Expo. The service would let customers rent Twentieth Century Fox (NWS) movies from their living rooms via Apple TV boxes, according to media reports. The service would work through Apple's iTunes online music store.

Over the long term, video-rental giant Blockbuster also could prove a potent rival. By acquiring MovieLink, Blockbuster has gained access to a download service that employs a new, flexible anti-piracy technology endorsed by all the major Hollywood studios. With it, titles can be downloaded to personal computers and burned to DVDs for viewing on almost any DVD player and television. Rivals such as CinemaNow aim to expand a similar service this year, letting consumers stream, view, or download content to approved Web-enabled devices.

Reed acknowledges that Netflix faces heavy-hitting competitors but says there's plenty of room for different approaches. \"The entertainment market as a whole is enormous because there are so many options,\" he says. \"The segment that we're focused on is streaming, where you click and watch from a service with an incredible selection and incredible pricing.\" Netflix may need all that and more to keep any lead resulting from its partnership with LG.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.




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