Reading Netflix's Shareholders' Letter

Every time one of these comes out, we learn a few interesting tidbits about Netflix and the video industry as a whole. For the first time in a while, this letter wasn’t utterly depressing. The company and CEO Reed Hastings seem to have stopped the exodus of users after last summer’s Qwikster blunder, and in fact are gaining users again. They are still company to beat in this space.

So, what’s so interesting in the Q4 2011 shareholders letter (PDF)?

The Numbers

Netflix added 220,000 streaming subscribers last quarter but lost 2.76 million DVD/Blu-ray subscribers. It’s possible that a lot of those customers are seeking out other ways to get physical media, but I’ll bet the majority are moving to streaming only for all their content needs. This is why Netflix wants to be a streaming only company.

The DVD/Blu-ray business is actually a lucrative one. There may be fewer physical disc subscribers but the are worth much more than streaming ones. In raw numbers, the 21.67 million streaming customers brought in $52 million in profit while 11.17 million DVD/Blu-ray subscribers pulled in $194 million. For every dollar of profit a streaming subscriber is worth, a disc subscriber is worth $7.23. That’s a huge difference.

So the numbers actually tell a good story. Physical media is proving to have decent staying power. DVD and Blu-ray aficionados will be happy about that. Personally I think Blu-ray’s picture quality is far superior to streaming so I prefer to get discs for visual feasts.¹ Plus, growth is the only thing that matters in Silicon Valley. As long as Netflix keeps adding streaming subscribers, they’ll be just fine.

Amazon to More Directly Compete with Netflix

This is the first I’m hearing anything like this:

We expect Amazon to continue to offer their video service as a free extra with Prime domestically but also to brand their video subscription offering as a standalone service at a price less than ours.

Amazon Prime Instant Videos actually is already cheaper than Netflix Watch Instantly at $79 per year. At $7.99 per month, Netflix comes to $95.88 over 12 months. If Amazon ends up offering a low monthly rate for only streaming video (Amazon Prime’s price tag also includes free 2-day shipping on all orders and access to the Kindle Lending Library) that could certainly heat up competition between the two companies. However, as Netflix’s letter wryly notes, neither Amazon nor Hulu offer as compelling a streaming library…yet.

Netflix Really Hates Ads

Looks like Netflix agrees with me:

In the case of Hulu Plus, subscribers have to pay for the service ($7.99) and still watch commercials (unlike, commercial-free Netflix). Even if Hulu could afford our level of content spend, at the same price consumers would prefer commercial-free Netflix over commercial- interrupted Hulu Plus.

Hulu Plus does pose a threat to Netflix, but ideologically they are very different. Just look at how each company talks about its customers. Whatever problems I have had with Netflix, I have never felt that they don’t respect me as a user. Take this, for example:

Constantly improving our service is key to satisfying current members and attracting new ones. The better we make the Netflix experience, the more hours are watched, translating into increased retention and strong word of mouth referral.

Classy, and true.

Streaming TV is About to Get Awesome

Over the next few years, UIs will evolve in astounding ways, such as allowing viewers to watch eight simultaneous games on ESPN, color coding where the best action is in a given moment or allowing Olympics fans the ability to control their own slow-motion replays. A decade from now, choosing a linear feed from a broadcast grid of 200 channels will seem like using a rotary dial telephone.

Yes, please. This sounds straight out of Back to the Future Part II.

Facebook Integration is Coming to the US Soon

Apparently the US is the only market in which Netflix isn’t able to automatically share out what you’re watching on Facebook thanks to the Video Privacy Protection Act from 1988 (VPPA). That may change soon though.

A broad bipartisan group of lawmakers from the House recognized the benefits of modernizing and simplifying this law and passed H.R. 2471, an amendment to the VPPA that clarifies the ability of consumers to elect to share their viewing history on an ongoing basis if they so wish. Now this proposed amendment is with the Senate, and they have scheduled a hearing on the VPPA for next week.

Here is the original VPPA (introduced by Patrick Leahy of PIPA fame, actually) and the new legislation that would amend it. As Netflix gets more social, I wonder what will become of movie sharing services like Miso, GetGlue and Letterboxd.

The good news about the US being the last to implement Facebook integration is that it sounds like it will be well refined by launch time.

In the UK and Ireland we launched with our best Facebook implementation to date.

Any UK readers have experiences to share?

Programming Paradigm Shift

Netflix’s first original series, Lilyhammer, starring Steven Van Zandt, starts February 6th. I had been wondering how Netflix would be rolling out new series. It turns out, at least in the case of Lilyhammer, they will make the entire first season (eight episodes) available at once.

Netflix members can enjoy the first season as quickly as they like, instead of having to wait a week for each new episode as they would with linear programming.

This hadn’t occurred to me, but it actually makes a lot of sense for web viewing. Part of the success of television on DVD and on streaming services is that users can watch at their own pace. This could be Netflix’s ace in the hole; not only do they have exclusive content but they have a superior way to deliver a show to you, one season at a time.

Television’s drama revival in the last few years in part reflects a narrative shift to epic, multi-hour threaded plot-lines. Netflix may be on to something huge here. The stories that television creators want to tell have been retrofitted into the weekly release schedule that has been the cornerstone of broadcasting for decades. That could change.

Conclusion

2012 is going to be a big year for Netflix. Now that Qwikster is just a bad memory, Hastings and his team have put the company back on an exciting trajectory. Cant wait to see what happens.