Much has been written in recent days about the rosy financials released by Netflix earlier this week. While most digital consumer companies are reporting collapsing profits or flattening revenues, Netflix certainly stands out from the crowd.
Several commentators have pointed to the recession as a direct cause for Netflix’s current success. But I agree with Netflix CEO Reed Hastings: “There’s no way for us to tell”. There is a lot of speculation at the moment in general about the recession’s positive impact on spending on home entertainment, such as pay TV, DVDs and digital music. I’ve heard this argument during previous recessions and I’ve never seen convincing data that proves it one way or the other. It’s tempting to point towards one set of data in isolation – the Netflix story is a good example – and draw this conclusion, but there is really no evidence of cause and effect. Netflix’s growth is just as likely, in fact more likely in my view, to be a result of customers simply adding their service to what they already get, or switching from alternative sources. It is not clear at all that the overall market for home entertainment is benefiting from a direct switch away from out-of-home spending.
Netflix’s story is strong evidence that premium online video is taking off in a big way, and the company confirms that it has underestimated the positive impact of having its technology integrated in connected TV devices such as flat panel TVs, Blu-ray players and Xbox 360s (a trend we noted as a key theme at CES). Even though the installed base of these devices is relatively low, they are already driving new customers towards the Netflix service, not least because the partners receive payments from Netflix whenever that happens.
It would be dangerous to assume that Netflix’s success can be replicated easily in European markets. Even in the US, connected TV content is in its infancy and Netflix is investing significant sums in building online content libraries. In Europe this process would inevitably be much more expensive on a per-user basis because of the fragmentation of the European content market. Rights would need to be negotiated on a country-by-country basis, and within a single country the costs per user relative to the US would inevitably be much higher.
Europe’s Netflix equivalents, such as Lovefilm in Germany and the UK, are currently nowhere near the same scale. Lovefilm is estimated to have revenues in the region of $60m compared to Netflix’s $1.36bn, and Netflix is clear that this scale is a key factor in allowing it to invest in new distribution technologies.
In case Netflix does eventually look at the European market, these considerations should be made alongside the fact that European interest in home video has never been anywhere near the levels of the US. On a per-head basis spending on VHS and DVD rentals, as well as purchases, have historically been much lower. One way or another the Americans just love movies more than Europeans.