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Netflix is in ur homz taking over your TVz

January 27, 2009

Netflix’ strategy was very simple from the start.  It started its end-around into the home by shipping DVD’s through the mail. Once it established its beach head, Netflix started taking a more direct route, sending content into the home through digital pipes connected to existing devices, completely by-passing the cable box.  The first real evidence of the success of this strategy was revealed recently, when it was announced that over 1 million people have watched over 1.5 billion minutes of programming, via their XBoxes over a 3 month span.

This is yet more proof that cable operators are totally screwed.  Netflix has over 9 million subscribers, and that base is growing at 26% per year.   They will do over $1 bil in revenues this year. While this may still be an order of magnitude smaller than large cable provider like Time Warner, Netflix is growing much faster.  AND mail is no longer the only way it is allowing users to by-pass traditional distribution models.  The XBox integration is a great example.  They have also integrated with set-top boxes like those built by Roku, TiVo and Samsung.  More importantly, they are starting to integrate with HDTV’s themselves, such as those from LG.  And NetFlix is not the only one doing this end-around.  TVs can now directly access YouTube clips, and as we’ve recently seen in the news, YouTube is also working with Hollywood talent to create original content.

I am willing to bet that by the end of 2009, between Netflix Direct, iTunes, Hulu and others, the amount of content that is streamed into a household bypassing linear distribution pipes (cable, broadcast, satelite and DVD rentals) is probably going to be greater than 10%.

While that may seem small, it is critical in one crucial way.  Non-traditional (read non-linear) distribution will only be taken seriously, when it is funding a significant portion of the content creation. Most of the best content is currently being pumped through the studio system for TV and film distribution, primarily because that is where most of the funding comes from.  Broadband and other distribution models are seen as “cream on top”, or cute little side projects.

We can talk all we want about deals like the one YouTube is going to announce with William Morris, but money talks.  And until people (through subscription services like NetFlix Direct or through purchases on iTunes), or sponsors (through advertising on sites like Hulu, or directly creating broadband content like Lexus), are funding a significant pieces of the content creation pie via non-traditional outlets, even A list talent can’t take non-traditional media out of amateur hour.

My rough math tells me Netflix will probably end up paying around $500 million in license fees back to content creators this year.  If even 10% of their content was viewed online, we are still only talking about $50 million coming from broadband to fund content.  That is still just a drop in the bucket for the studio system.  But that could double very quickly.  And when you add that up, along with the money that flows through to content creators from the likes of Hulu and Apple by the end of this year, I think we are going to start seeing enough dollars flowing through for content creators to finally sit up and notice.

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