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Slow road to online film service at an end for Netflix

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Comment It was in 2004 that Netflix CEO Reed Hastings first talked about its film download service, and back in July 2005 when beta trials were first leaked and the system was taken a look at, but it is only now that a truncated, half hearted movie on demand system is finally emerging from the US online DVD rental leader.

And in the end the company has fumbled the ball entirely and delivered it purely as a free service in order to drive down churn in its online DVD rentals, rather than give it a serious shot at changing its business model.

And with Netflix's last revealed quarter showing just a 4.9 per cent margin, with net income of $12.7m on $255m of revenues, it needs the vastly improved margin that it could get by having an online film rental service, because then it wouldn't have to maintain a DVD ownership base of around $429m (amortised down to $92m) on its books at any given time.

But at the same time the company has a lot to gain by bringing down churn in the short term, as it lost 4.2 per cent of its customers last quarter, and 4.3 per cent the previous quarter. It hopes that by giving away a few films to a few loyal subscribers it will save on customer acquisition costs, which have been growing every quarter and are often more than three months' income from the customer.

Netflix says just 1,000 movies will be on its online database, as opposed to the 70,000 physical DVD titles it holds, and initially these would be available to a small subset of its five million subscribers, gradually growing out to most of them by this June.

If an existing online DVD rental customer has the entry level $5.99 plan they will get six hours of free online movie watching per month, while subscribers on Netflix's $17.99 unlimited plan will have 18 hours of online movie watching per month.

In the end, if you believe that online DVD rental will one day be replaced by online downloads, then it's clear the models need to be separate. However, this is the typical approach of online DVD rental firms, and it's the reason why they will never make the effort to digitise enough films and create a genuinely high value online film experience, because all they are really interested in is their old business model.

Company CEO Reed Hastings CEO said: "While mainstream consumer adoption of online movie watching will take a number of years, due to content and technology hurdles, the time is right for Netflix to take the first step. Over the coming years we'll expand our selection of films, and we'll work to get to every internet-connected screen, from cell phones to PCs to plasma screens. The PC screen is the best internet-connected screen today, so we are starting there. "

Netflix says it has no plans to offer download-to-own online film services, and will stick to download to rent.

Netflix also says its new online service differs from current services in that it does not require a lengthy downloading period, but instead uses real-time playback technology allowing the video to be viewed at virtually the same time it is being delivered to a user's computer.

It requires a one-time, one minute installation of a simple browser applet, and then movie selections will begin playing in the web browser of a PC in as little as 10 to 15 seconds after streaming is initiated. It needs 1 Mbps of bandwidth and if you break the connection from your PC to the Netflix website, the film stops showing.

Movies can be paused, fast forwarded and rewound just like most internet streams, and are sensitive to the total end to end bandwidth. The more bandwidth someone has, the better quality the film will play at, Netflix says, and it achieves DVD quality at 3 Mbps.

Netflix says most of the major and many independent studios are supporting the introduction of the new feature, including NBC Universal, Sony, MGM, 20th Century Fox, Paramount, Warner Brothers, New Line Cinema, and Lionsgate.

In addition, content is being provided by A&E Television Networks, Anime Network, Allumination FilmWorks, BBC Worldwide, Cinema Libre Studios, Egami Media, Film Movement, Hart Sharp Video, The Independent Film Channel, Magnolia Pictures, New Video Group, New Yorker Films, Palm Pictures, Seventh Art, Silvernitrate Entertainment, Starz Digital, ThinkFilm, Video Action Sports, WMG Productions and Wolfe Video, among others.

The new system will be integrated into the existing Netflix website as a "Watch Now" tab on a DVD order.

Copyright © 2007, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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