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Posted by James McQuivey on November 9, 2010
Netflix announced its Q3 2010 earnings a few weeks back and the numbers were every bit as positive as people have expected. The company added nearly 2 million subscribers in the quarter, almost four times as many subs as they added the same quarter last year. Yeah, four times as many. While Comcast and Time Warner announced net subscriber losses. At the same time, the cost for Netflix to acquire a customer has fallen 26% in the past year. Funny how when you digitize the customer relationship and the product at the same time, all your costs go down.
The number I always wait for from Netflix is the percent of subscribers that used Netflix Watch Instantly in the quarter. It rose to 66% this quarter, up from 64% last quarter. And remember, this was while adding 2 million new subscribers, which means that new subscribers are adopting Watch Instantly at a rapid rate instead of waiting to get used to Netflix; in fact, they're probably joining Netflix just to watch instantly. This is, of course, why Netflix will likely offer a digital-only plan that subscribers can pay for if they don't even want to pretend to put DVDs in their queue.
Why is this important today? Because it was just now that I finally dug through the summary financial results to find this gem of a quote, something that was briefly reported when Netflix announced it results, but was not fully understood in most of the reports I read. I want to resurface it because this is a big deal:
"In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD. With that transition in the business from mostly DVD to mostly streaming, this will be the last quarter the company will report this metric." (emphasis mine, quoted from page 2 of this financial summary)
In other words, if you are a Netflix customer on a 4-DVD plan and you churn through those DVDs at a rate of one a week, you're watching about 8 hours of DVD content a month from Netflix. To beat that in digital, you have to watch at least 2 hours of streamed video from Netflix a week. That 2+ hours is coming from somewhere. Is it coming from YouTube? Unlikely. Given how much of Netflix viewing is happening on an Xbox 360 or other living room device (according to some of my ISP clients), Netflix Watch Instantly represents the first IP-delivered video source that is competing directly with linear television, on the television screen. With this going on, how cute is it that the industry is instead concerned about whether Hulu video shows up on a few Google TVs?
Here's what this means: Netflix is now a digital video streaming company first that happens to also offer DVDs by mail. The percent of subscribers that watch instantly is no longer just material to the business, it is the business. This should not come as a surprise, after all the company is named Net-flix. How prescient!