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.

Twitter: twitter.com/dmercer15

Client Reading: Digital Media Survey: An analysis of US Online Premium Video Users

Just back from Vegas, and as the security guy said to me on the way through a deserted terminal - “one of the survivors of CES”; yes, and one of the few. I will be very surprised if attendee numbers are not down significantly. OK, I did arrive in plenty of time for the Virgin flight, the only direct flight to the UK, but there were actually empty seats on the plane, just as there was room to move around the vast LVCC without literally rubbing shoulders with every passer-by, and just as the hotels had slashed rates last November and were still offering great deals throughout the event.

So we would be forgiven for writing off CES 2009 as a non-event in the midst of what is clearly a severe downturn in the industry. Off record major exhibitors were clearly very nervous about sales prospects over the coming months, and some commentators have even suggested this was the CES swan-song and that it will collapse under its own, admittedly much reduced, weight.

But while we are clearly heading through very difficult times, I find this latter scenario extremely unlikely. In fact, having reported to our clients last year that CES was losing any sign of a wow factor, if anything there was more excitement this year than for some time. The fact that the rival Macworld was clearly more subdued than usual only helped to emphasise that CES is still the one place to go to see all the major consumer technology innovations.

That’s not to say that there was a lot that was genuinely new; there is, as they say, nothing new under the sun. But I did get the sense that, spurred on by the reality of declining sales from existing technologies, exhibitors had put more effort into demonstrating that the next wave of innovations is not just R&D fodder: these are products that will catch consumers’ imagination and, more importantly, win their hard-earned dollars, as and when the next upturn begins, which it surely will.

It will not be news to readers of this blog, but the subject of connected TV was clearly at centre stage at the 2009 CES. Since the first stumbling attempts by the likes of Sony with its add-on Internet Video Link, all the major TV vendors now have product rollout plans for integrated connectivity and associated internet applications and services. The biggest splash was made by Yahoo, which, in alliance with Intel, is finally making progress on the digital home strategy it has been talking about for perhaps too long. Yahoo and others are focusing on giving TV viewers access to “widgets”, allowing them to customise, to a certain degree, the information they see on their big screens.

As Barry reported Strategy Analytics recently carried out research with Oregan Networks focusing on user interest in media browsers. When asked about the perceived value of various browser applications, we came up with the following ranking in order of importance:

1. Access Video on Demand without a PC
2. Searching the home network for video content
3. Access user-generated content such as Youtube
4. Play media from a USB drive
5. Share television experience using messaging services
6. Make video conference or voice calls via the TV
7. Download widgets
8. Give the TV different colour schemes or skins

This may not be good news to the likes of Yahoo and a number of other firms that have focused on using the Internet to bring information and data to the TV screen. But it should not be surprising that what consumers want to see on their “TV” screen is… TV. Many of them are now fully aware that a vast video content library is available on the internet, and they would like to see that content on the TV set.

From a technical point of view, we know that this is not a straightforward exercise. The challenges of competing codec and other technology standards, as well as the uncertainty and unreliability of broadband connectivity, mean that there is very little any player in the value chain can do to guarantee how internet video will appear on the big screen in a real-world situation, if, indeed, it does actually appear. It is understandable that few players are willing to commit to internet video as the primary capability of connected TVs when they have historically put so much effort into guaranteeing the best possible video quality and reliability from “managed” TV services such as broadcast and cable.

The conclusion is that we will likely go through a period of a few years as TV buyers become more accepting of the variability in quality of internet-based video and television services. The evidence suggests that they will be prepared to put up with the weaknesses of internet video in return for the increased choice and control it gives them.

Apart from connected TV, we saw new developments around 3D, user interface and control, and more powerful portable devices. You can read more feedback from CES at my Strategy Analytics blog.