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Netflix: Tryin' to get older 14 September 2004
"Speculation about a Netflix/Tivo alliance is understandable and we brainstorm those possibilities often. However, there is no specific relationship defined or timeline." Netflix Spokeswoman Lynn Brinton
Netflix was one of my innovations to watch in 2003, and it has performed extraordinarily well, growing from revenues of $5 million in 1999 to more than $400 million estimated in 2004. Up until July of this year, the stock had risen from a low of $5 to a high of $37.
The company is now running into trouble. Not with demand. Netflix currently has over 2 million subscribers, and revenues have grown over 100% from last year. Rather, the problems are profitability and competition. Blockbuster and Wal-Mart have both launched services similar to Netflix. As it responds to these competitors, Netflix’ profitability is eroding.
On 30 July, the company reported a doubling of sales in its second quarter, but missed per-share profit targets by two cents, or about twenty percent. It blamed this on higher costs to acquire subscribers and rising subscriber churn. As Netflix execs noted, it’s getting more expensive to find and keep customers. Following this report, Netflix’ stock fell, trading as low as $14 a share in August.
The unfolding Netflix saga underlines the challenge of succeeding after the innovation. Netflix’ innovation has been successful, and success has prompted imitation. Now customers have their choice of three similar services, and two are run by established companies with strong reputations and financial resources.
In response, Netflix has zigged and zagged. It has raised prices to try to improve its anemic profitability. It is beginning to advertise on television to increase its penetration.
On 7 September, CBS Marketwatch reported a potential tie-in between Netflix and TiVo, the company that makes digital video recorders. This match-up would allow TiVo subscribers to download Netflix DVDs. It would move both TiVo and Netflix closer to the current holy grail of video-on-demand (VOD).
TiVo’s CEO is on the board of Netflix, so the companies have some shared history. As a Netflix spokeswoman noted to CBS’ Marketwatch, in denying this particular rumor:
"Speculation about a Netflix/Tivo alliance is understandable and we brainstorm those possibilities often. However, there is no specific relationship defined or timeline."
While Netflix and TiVo are both subscriber services aimed at television watchers, the two offers look very different to a prospective customer. Here’s how the two line up in the four factor model:
Netflix has a free trial period, which lowers the barriers to purchase. All you need is an internet connection, a DVD player, and a mailbox, and you can try out Neflix. TiVo requires a leap of faith (to purchase the equipment), and then a substantial investment of time to program the recorder.
Many of the TiVo subscribers are messianic about their love of the system. Perhaps they have to be to convince others to use it, since it’s one of those products where you have to make significant upfront investments of time and money before you get any benefits.
TiVo has been suffering for a long time. While its sales rose 77 percent to $24 million in the quarter ending July 31st, its losses more than doubled, to $10.8 million. The company has not had a profitable quarter since it went public in 2000.
A TiVo – Netflix alliance may result in some technical breakthroughs in the VOD area, but it’s hard to see how it would have material impact on either company’s performance. Netflix’ sales are almost five times more than TiVo’s, and Netflix is working hard to make the leap from niche product to mass market. TiVo’s subscribers are growing, but much more slowly.
The combination of the two services would create a new offering for both companies, but would not address the challenges each company faces in moving to a profitable mass market entertainment service.
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