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What gives you confidence in the size of the opportunity for online DVD rental?
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- The overall DVD rental market has been stable at about $8 billion in U.S. consumer spending annually, according to Adams Media Research. We have a lot of room to grow our share of that market as the video store business continues to contract and more store customers switch to online DVD rental.
- Additionally, our Q4 2007 results of strong subscriber growth, low subscriber acquisition cost (SAC) and sequentially improved churn are proof points that the market for online DVD rental is still growing. Also, as our subscriber guidance issued on Jan 23, 2008 indicates, we expect continued subscriber growth for 2008.
- Despite our confidence in online DVD rental growth over the next few years, we know there will be an evolution at some point to Internet delivery of content. Netflix is investing somewhat ahead of the Internet delivery opportunity to ensure that we enjoy a similar leadership position in that delivery mode as we have in online DVD rental.
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Over the history of Netflix, a number of big competitors have entered the market and not been able to effectively compete. What are the advantages that enable you to fend off competitors?
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- We are the clear leader in online DVD rental, with more than 7.5 million subscribers and the highest levels of customer satisfaction in Internet retailing. We also enjoy significant economies of scale, which gives us cost advantages over any competitors.
- We continue to make the best service even better, with meaningful and industry leading improvements to our movie service in the past year
- We now offer unlimited streaming of more than 7,000 choices of movies and TV shows as part of the Netflix subscription.
- We improved our customer support with our representatives answering phones 24 hours a day, seven days a week.
- We added shipping points around the country for more next day delivery and now have over 100 shipping centers.
- We improved our web site's ability to recommend more content consumers will enjoy.
- We lead the rental market in selection, offering 90,000 titles on DVD and more than 7,000 choices streamed to your computer (and eventually to your TV).
- Our investments in improving our service and subscriber experience continue to pay off. In independent surveys of Internet customer satisfaction by Nielsen Online and ForeSee Results, Netflix was once again rated number one in American e-commerce, edging out such giants as Apple and Amazon.
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Why do you think DVDs / physical media will last when there is so much excitement over Internet delivery?
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- While some predict there will be a rapid transition to content delivered over the Internet to the television, these evolutions take time.
- People like the quality and convenience of DVDs; they are simple, relatively inexpensive, and ubiquitous, all of which make them very appealing to consumers. DVDs were clearly superior to the VHS format, and DVD players became inexpensive and widely available. The result was the fastest adoption of a new consumer electronic product in history – but it still took five years before there were DVD players in 50 percent of U.S. households. We expect the evolution away from physical media will also be a slow and gradual one.
- Despite our confidence in online DVD rental growth over the next few years, we know there will be an evolution at some point to Internet delivery of content. We're determined to capture a leadership position in Internet delivery similar to our position in online DVD rental, and that's why we're investing now in the development of our Internet delivery option.
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Why do you think you can be as successful in Internet delivery of content as you have been in online DVD rental?
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- Many of our core competitive advantages transition well into Internet delivery of content
- Easy to use and intuitive website
- Personalized movie recommendations based on two billion subscriber ratings
- Relentless focus on continuously improving the customer experience
- Proven competence in making unlimited subscription a profitable business model
- Most importantly, as Internet delivery emerges, we are uniquely positioned to offer access to the widest range of content, through a bundled offering combining DVDs by mail with instant delivery over the Internet, all under one unlimited subscription plan.
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What are your thoughts about competition from Cable and / or Internet VOD as the market moves towards Internet delivery of content?
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- Despite the increasing speculation about the threat to the entire DVD industry from cable and Internet VOD, we do not regard these services as material short-term threats for several reasons.
- Cable VOD has been around in volume for the past five years without gaining a great deal of traction. Internet VOD from Movielink and CinemaNow have also been offered for the past five years. During that time, DVD rental has been stable, with online rental and kiosk rental making up for losses in store based rental. And in the U.S., DVD spending including purchase is still approximately 20 times larger than cable and Internet VOD combined, according to Adams Media Research.
- DVD rental continues to have many advantages over either cable VOD or Internet VOD, including access to a wider selection of content, widespread consumer ownership of DVD players, an earlier window for new releases, and lower prices. In contrast, cable and Internet VOD cost about four dollars per movie, with content not available on VOD until 30 to 45 days after it is released on DVD. Additionally, with VOD, you only have 24 hours in which to complete watching the movie, which means that if you watch over two nights, you pay twice.
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