Need Netflix Worry Over Apple's Movie Rentals?

by: Larry Dignan January 16, 2008 | about stocks: AAPL / BBI / NFLX    

Larry Dignan

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Apple (AAPL) makes a big plunge into the movie rental business and almost instinctively folks dust off the “Netflix is screwed” line. However, you may want to hold off on that Netflix (NFLX) obituary (again).

Now it’s entirely possible that Apple’s movie rental service (gallery, blog focus, video) will be a hit for the iPod carrying masses. And I’m sure I’ll rent a movie when I travel. But Apple’s movie rental service doesn’t spell the demise of Netflix for a bevy of reasons. Here are a few:

  • Apple’s movie rental service is confined to the PC and the iPod/iPhone unless consumers buy Apple TV, a device that promises to be better the second time around but still is another box in an already cluttered living room.
  • Apple’s rental service is the same pay per view model everyone is used to, but Netflix’s model is subscription based. Some consumers will be fine with a rental that self destructs 24 hours once a movie is initiated. Other people–heavy movie watchers–appreciate the all-you-can eat approach of Netflix. They are two different audiences that can coexist. One audience cares that Netflix has a catalogue of 90,000 titles compared to Apple’s 1,000 titles. The other audience could care less.
  • iTunes movie rentals are designed to sell iPods. That’s a big distinction there. Apple’s biggest goal with its movie rental launch was to get all the studios on board so you’ll buy its devices. To do that Apple basically agreed to the same model cable companies go with. You pay $2.99 to $3.99 to view a movie for 24 hours. Netflix’s model is designed to deliver a recurring subscription revenue stream. Simply put, Apple isn’t wasting its time trying to put Netflix out of business.
  • The game is to get into set-top boxes. Apple wants you to buy a new box for movie rentals in a couple weeks. Netflix will be embedded in LG set-top boxes in the second half of the year. In the long run Netflix’s plan may make more sense, but good luck ousting the incumbent providers.
  • Netflix’s real worry is Blockbuster (BBI) not Apple. Apple’s service will take time to gain mass adoption. Blockbuster has much more potential to give Netflix a headache with pricing pressure and its replica mail delivery model.

Will iTunes be a viable threat to Netflix? You bet. But it’s nothing that Netflix hasn’t seen before.

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This article has 8 comments:

  •  
    Jan 16 05:31 PM
    A guess as to the goal: 1) DSL/FIOS will allow transmittal of basic TV programming through the computer 2) same can be accomplished over the internet 3) movies on demand come through Apple TV, also over the internet 4) Apple TV acts as a box to wirelessly connect to your computer and 5) Apple TV wirelessly connects to a new format large screen tv monitor.

    The result could be a TV viewing system with Apple's simplicity and elegance. The Apple TV box sits discretely on a shelf. A large screen sits on the wall with no wires (except maybe power if there is no hidden outlet behind the TV). Images come wirelessly form the box to the TV. Better yet, Jobs links it all to your MAC so you now have full computer/internet capability in your living room on the HD TV as well.

    Just a thought.
    Reply | Link to Comment
  •  
    Jan 16 05:54 PM
    In the future (read: 3-5 years) I think you will see the convergence of PC and TV more widespread and because of that Apple is setting itself up perfectly for that. For the short term Netflix is not in deep trouble because most people would rather have the actual DVD so they can watch it when they want, whereas the 24-hour window to watch a movie is just not a viable model. People want to watch their movies when they want, so that won't be enticing to pay $3-5 for a movie and only be able to watch it within that time.

    One thing Netflix needs to work on is their "watch now" feature because from personal experience I have tried to get it to work 3 separate times since they've introduced it. And every time I get buffering problems, yet I have Verizon Fios, a fast computer, great video card, etc. No matter what I do there is ALWAYS a lag that makes me shut it off before I can finish watching it. And even bigger is the inability to make it true fullscreen as well as the poor video quality, it's like trying to watch a full movie on youtube...not fun. Apple's trailers are a testament to the quality they bring to the table and Netflix really needs to step up to the plate and improve the quality otherwise they will be on the losing regardless of their past successes.
    Reply | Link to Comment
  •  
    Jan 16 06:10 PM
    I'm not getting the choices some companies make--why not just make Netflix compatible with Apple OS and head off that problem for years to come--or at least carve out your share of business among Apple software users up front and enjoy the revenue stream? Why cheap out on developing the inevitable?
    Reply | Link to Comment
  •  
    Jan 16 06:10 PM
    The difference between Apple and Netflix is that Apple develops the technology to stream video so again like their mac-line they can fine tune the hardware to the software and improve quality, efficiency, etc. I think what apple needs to do in the future is develop their own TV. get rid of the wires, multiple remotes. I mean they already make great cinema displays. If you want something done right you need to do it yourself.
    Reply | Link to Comment
  •  
    Jan 16 07:54 PM
    i like the option to have the apple dload, but many people- especially people 35 and over- want to get something in the mail and just put it in their dvd player. both formats can exist successfully.

    Scott W
    growthportfolio.ning.c...
    investment social network
    Reply | Link to Comment
  •  
    Jan 16 08:33 PM
    "I think you will see the convergence of PC and TV more widespread and because of that Apple is setting itself up perfectly for that."

    Perfectly? that's a little optimistic.
    Reply | Link to Comment
  •  
    Jan 17 12:41 AM
    Apple's movie downloads can be loaded on to an iPhone or an iPod and that can connect to the TV set with simple cables and watched by one and all.
    You do NOT have to own an Apple TV, but you will need something to store it on, and a Mac or PC to get it.
    Scenario: busy people, young kids, 10 at night - d/l a movie and watch it NOW, because they have time NOW, but no time to go to a video store.
    As tessant said above, both Netflix and Apple can co-exist for the foreseeable future.
    Reply | Link to Comment
  •  
    Jan 17 03:29 AM
    I disagree with your assertion that Apples intent with the movie rentals is simply to spur more hardware sales. I see no evidence of that at all in fact. That's simply your opinion. Period. The evidence however shows that Apple has made significant $$$ from music downloads and hopes to do the same with movie rentals. Also, you fail to mention Steve Jobs himself has stated in interviews 1) the initial 1000 movie titles will quickly grow to many many more and 2) the 30 day wait period will eventually be done away with as studios become more comfortable with digital movie rentals as a viable revenue source replacing dvds. Your article has a decided netflix "slant" that doesn't really see things objectively. Another point you fail to mention: Apple is offering HD downloads: Netflix does not. Also, while Netflix has announced a coming "box" with LG to put movies on tv's, Apple has it now with AppleTV. Apple is a step ahead of Netflix in all ways except for the number of movies in its catalogue...a situation that will change soon enough i can guarantee you. It's exactly the same situation as when itunes first started, and now just about everyone is aboard.

    A last point, and something that is actually VERY appealing to people is the ability to take the same digital movie download and choose whether you want to watch it on your tv, your ipod, your iphone or what have you. That's HUGE. It's the only service that enables you to use the same service for both home tv hd rentals AND portable downloads to take with you on trips or wherever. That's a value added that MANY will pick Apple over all the others for. Any addition Ipod or Iphone sales they make is just gravy.
    Reply | Link to Comment
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