All Things Digital

Well, Notflix is Netflix once more. The company finally resolved the technology problem that crippled its ability to mail DVDs to members for most of this week. As of this morning, all Netflix (NFLX) distribution centers are operating normally, and the backlog of DVDs that should have been shipped earlier is finding its way into the mail. “If a member should have been shipped a disc Tuesday, Wednesday or Thursday, with rare exception it will ship today (Friday),” the company explained. “As a result, millions of our members will receive DVDs on Saturday, in time (we hope) for some weekend movie enjoyment.”

To make amends for the outage, Netflix plans to apply a 15 percent credit to billing statements of members whose DVD shipments were delayed.

A welcome turn of events after an ugly week that saw Netflix customers losing their patience and the company losing an estimated $1.8 to $3.6 million in revenue each day because of the disruption.

Netflix’s March 2008 outage is back, this time in wide theatrical release. A serious disruption to the company’s distribution systems has prevented it from mailing DVDs to many of its customers for the better part of this week. “Our engineers continue to work around the clock to restore normal operations,” Netflix said in a post to the company blog today. “In the meantime, we’re notifying affected customers via personal email and we’ve posted a notice on the Netflix Web site. We’re as frustrated about this as you are.”

I’d imagine so, if not more. The outage is an ugly blow to the Netflix (NFLX) brand and to its bottom line as well. Citi analyst Tony Wible estimates that the company is losing roughly $1.8 million to $3.6 million in revenue a day. And the reimbursement credits it’s promised to affected subscribers are certain to prove costly as well. Said Wible, “Assuming only one-third [of the company's subscriber base] is affected for one-to-two days, [Netflix] stands to forfeit nearly $1.8 million to $3.6 million in revenues (using a $13.36 average revenue per user), or roughly $0.007 to $0.015 in earnings per share.”

A costly misstep given Netflix’s Thursday afternoon shipping update:

We hope to bring the rest of our facilities back online overnight and be shipping from all of our distribution centers on Friday. But the issues we’ve faced over the last several days have been significant and there’s no guarantee at this point that our shipping operations will be fully restored by tomorrow.”

The slowing economy has been kinder to Netflix than most. On Friday the online DVD rental pioneer posted its sixth consecutive quarter of profit, handily beating estimates. Analysts, on average, had expected Netflix (NFLX) to post a second-quarter profit of 40 cents a share. Instead, the company reported a profit of 42 cents a share. Subscriber growth was equally impressive. Netflix ended the quarter with approximately 8.4 million total subscribers–a 25 percent year-over-year increase from the 6.7 million subscribers it had at the end of the second quarter of 2007. Quite an achievement, since Netflix has cut back on advertising to keep profits high. And one the company plans to surpass in the months ahead. By the end of the third quarter, Netflix expects 8.68 million to 8.88 million customers, and 9.1 million to 9.7 million at year-end.

Interestingly, the company believes that there’s still quite a bit of life left in its DVD-by-mail model. “We believe that DVD-by-mail will continue to grow for five to ten years, despite overall DVD rental flatness, as e-commerce continues to grow generally and as video store economics force more store closures,” Netflix CEO Reed Hastings said in a conference call. “As we expand more into streaming, we are improving our core consumer proposition of unlimited enjoyment for a low monthly fee by combining unlimited DVDs by mail with unlimited streaming.”

And what of the pay-per-view market? Hastings says the company isn’t focusing on it. “We don’t plan to enter the pay-per-view segment where Apple, Amazon, Sony, and others focus, or the ad-support segment, where Hulu, YouTube, and others compete,” he explained. “Both of those segments will likely be substantial but our subscription segment will also be large and will provide Netflix plenty of room for growth over the coming year.”

Indeed. Certainly, the company’s new Roku box, which lets customers stream any of Netflix’s 10,000+ “Watch Now” movies to their TVs has proven that already. “Our results to date with this approach have been excellent, starting with the launch of the Roku box in May,” Hastings said. “This $99 box allows Netflix subscribers to instantly stream movies and TV episodes to their TV. It’s been a huge hit with strong reviews, strong sales, and great subscriber satisfaction. Roku purchasers are streaming video to their TVs and getting great value for the unlimited streaming portion of their Netflix membership. In the future, Roku boxes will support other Internet video content and migrate from being a Netflix only player to a general Internet video play, which will increase Roku’s sales and therefore the number of TVs we can stream to.”

Lot of good that $2.7 million HD DVD Super Bowl ad did. This morning, online DVD rental pioneer Netflix, which has stocked both Blu-ray and HD DVD formats since they first came to market in early 2006, said it is dropping HD DVD. Quite a blow to the HD DVD camp–which, after a number of high-profile defections, is supported by just two major studios, Paramount Home Entertainment and Universal Studios Home Entertainment.

And not for much longer, says Ted Sarandos, Netflix’s chief content officer. “The prolonged period of competition between two formats has prevented clear communication to the consumer regarding the richness of the high-def experience versus standard definition,” Sarandos said. “We’re now at the point where the industry can pursue the migration to a single format, bring clarity to the consumer and accelerate the adoption of high-def.”

It appears there may be a bit of a boxing match shaping up between Apple and Netflix. Amid reports that Apple has inked a video-on-demand deal with Twentieth Century Fox, Netflix has announced plans to develop a set-top box that will give consumers the ability to stream movies directly from the Internet to HDTVs. The DVD-by-mail pioneer has enlisted South Korean manufacturer LG Electronics to build a set-top box that will extend its Watch Instantly online movie-delivery service from the PC to the TV. Netflix plans to offer the service–expected to roll out in the fall–for free to its subscribers and the box for a price that’s yet to be announced.

“We think we have solved the real fundamental problem, which has been that choosing movies on a television has been extremely challenging,” Netflix CEO Reed Hastings told the New York Times. “Video-on-demand companies worked at it for a long time, but choosing movies on the TV just doesn’t have the power of the Web. We want to be integrated on every Internet-connected device, game system, high-definition DVD player and dedicated Internet set-top box. Eventually, as TVs have wireless connectivity built into them, we’ll integrate right into the television.”

A compelling vision of Netflix’s future and one that may sound the death knell for Blockbuster, Amazon’s Unbox and Vudu as well. Or perhaps not. Certainly, this little bit of legalese at the tail-end of the press release announcing the services belies Hastings’s optimism just a wee bit.

This press release contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding the development of a set-top box for delivery of content over the Internet to television sets, the delivery of a compelling online home entertainment service, Netflix’s strategy and positioning in online delivery of content, and the future of Internet to the television. These statements are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation; the risk that the development of the set-top box or its associated online delivery service may not meet technical requirements, consumer expectations, or otherwise be implemented by the parties; that certain studios will not grant either of the parties necessary rights or otherwise impose limitations on such rights that might impede implementation or hamper consumer adoption; Netflix’s ability to create other partnership opportunities for the delivery of digital content to the television; and possible technological or content licensing impediments.”

Apparently, NBC Universal doesn’t know that jumping into rebound relationships after a particularly painful breakup is rarely a good idea. After Apple tossed its fall TV lineup off iTunes in August, saying the two companies couldn’t agree on pricing, the broadcast network has been spitefully seeking out distribution deals wherever it can find them: Hulu. Then Amazon Unbox. The hilariously ill-conceived NBC Direct. And Netflix.

Now SanDisk. Today, NBC U said it would make its shows available on SanDisk’s recently launched Fanfare PC-to-TV video player service. Come January, consumers will be able to download episodes of NBC series they can no longer purchase on iTunes, and transfer them to their TVs via SanDisk’s TakeTV product.

“Fanfare is going to be an iTunes-like store for us,” NBC U’s president of digital distribution, Jean-Briac Perrette, told Silicon Alley Insider. But with one noteworthy difference: NBC U controls pricing. “The business model is one we like,” said Perrette. “It’s normal for content owners to control the wholesale price of their content. This is no different than any other wholesale relationship; it’s not different in the sense that Wal-Mart decides to price DVDs at a loss. Ultimately we still set the wholesale price.”

People keep asking what Web 3.0 is. I think maybe when you’ve got an overlay of scalable vector graphics–everything rippling and folding and looking misty–on Web 2.0 and access to a semantic Web integrated across a huge space of data, you’ll have access to an unbelievable data resource.”

–Tim Berners-Lee, May 2006

Web 2.0 is well documented and talked about. The power of the Net reached a critical mass, with capabilities that can be done on a network level. We are also seeing richer devices over the last four years and richer ways of interacting with the network, not only in hardware like game consoles and mobile devices, but also in the software layer. You don’t have to be a computer scientist to create a program. We are seeing that manifest in Web 2.0 and 3.0 will be a great extension of that, a true communal medium … the distinction between professional, semiprofessional and consumers will get blurred, creating a network effect of business and applications.”

–Jerry Yang, co-founder and CEO of Yahoo, November 2006

“Web 1.0 was dial-up, 50K average bandwidth, Web 2.0 is an average one megabit of bandwidth and Web 3.0 will be 10 megabits of bandwidth all the time, which will be the full video Web, and that will feel like Web 3.0.”

–Reed Hastings, founder and CEO of Netflix, November 2006

Had to happen sooner or later, right? The lexicographers who gave us the term Web 2.0 have finally gotten around to issuing an “official” definition of Web 3.0 and, having undoubtedly scurried to trademark the term, are probably already plotting the pricey industry conference that will accompany it.

So what is Web 3.0, “officially”?

Web 3.0 is defined as the creation of high-quality content and services produced by gifted individuals using Web 2.0 technology as an enabling platform.”
–Jason Calacanis

In other words it’s Web 2.0 2.0, Web 2.0 with another 1.0’s worth of marketing BS. Or, as Josh Kopelman, managing director of First Round Capital, aptly puts it, “any Internet-based company that has launched after 2004.“

From top to bottom, Blockbuster is deliberately and willfully infringing on our patented methods. Netflix invented a 100 percent better mousetrap that Blockbuster copied.
- Netflix spokesperson Steve Swasey, April 5, 2006

Apparently, Blockbuster isn’t as hopelessly tethered to its VHS rental-business past as you might think. Yesterday, the video-rental retailer acquired studio-owned movie download service Movielink and with it a potentially significant foothold in the video-on-demand market. Terms of the deal were not disclosed, but early this year when rumors of an acquisition first began to circulate, analysts had estimated that Blockbuster might pay as much as $50 million.

Founded in 2002, Movielink is backed by Paramount Pictures, Sony Pictures, Metro-Goldwyn-Mayer, Universal Studios and Warner Bros. Studios. But while its impressive catalog makes it one of the Web’s largest digital-movie libraries, the service hasn’t caught on because of its strict digital-rights management software and prices (roughly the same as a typical DVD). Still, it’s likely a good acquisition for Blockbuster, whose market value has declined to just over $800 million from $8.4 billion, largely because of its failure to buy Netflix when it had the chance.

Blockbuster chair and CEO Jim Keyes called the deal the next “logical” step in the company’s transformation. Presumably, that means the next phase in Blockbuster’s re-creation of the Netflix business model, which the video-rental chain has been diligently following for the past few years. Netflix, of course, is spending some $40 million this year on its own VOD service, which is already up and running.