Netflix’s distribution channels

Having spent enough time on the cost side of Netflix, I want to write a bit on the sales and distribution channels.  When Netflix started offering their streaming video service 7+years ago, I remember that I can only use the service on a browser window that runs on a Windows PC.  Fast forward to 2012, almost all of our entertainment devices are connected.  There are additional categories of products where Netflix can be watched such as televisions, blueray players, network streaming player, tablets, and smart phones.

Let’s review them briefly:

Category Dominant players Dominant Platform/OS 2012 units (source: Qualcomm Analyst Day presentation, Asymco, various) Have Netflix?
Smart phones Apple, Samsung, HTC iOS, Android 500m+ yes
Tablets Apple, Samsung iOS, Android 70m+ yes
Smart Televisions Samsung, LG, Vizio various (Linux/BSD) 30m+ yes
BluRay players Samsung, LG, Vizio various (Linux/BSD) 40m+ yes
Gaming devices, Streaming players Xbox, PS3, Roku various (Linux/BSD) 100m+ yes
Cable/satellite STB Comcast, DirectTV various (Linux/BSD) 70m+ no

From engineering stand point, Netflix has done a good job of getting their streaming software running on these various platforms relatively quickly.  From business/value chain point of view, signing these consumer product OEMs and platforms to Netflix is relatively easy given the pull of the Netflix brand from consumers.  20m+ Netflix subscribers want to watch Netflix content on their new devices and having a new TV/Blueray player that can stream Netflix will allow device manufacturers to up sell new or replacement product.  From marketing perspective, Netflix is prominently displayed in various consumer product packaging or promoted in App Stores with very good product placement.  They now have a much better distribution channels compared to other competing service.  Amazon is catching up, Verizon does not have a product, Comcast and Dish offer the service as defensive strategy to keep their subscribers.

The number of devices can mislead you into thinking that this is Netflix’s potential.  However, the real potential number for Netflix is 100m+ US households + their international expansion.  Each household will pay for 1 service and share the account with the family members.  At 20m+ subscribers, there is still room to grow.  At $8/month, this is 2-3 cups of Latte per month.  The price is so low it could almost be an impulse buy.  With much better consumer sentiment, why can’t they go to 35m-40m households with a bunch of niche contents, a few blockbusters, and original series (on-demand cable channel)? 70% of American households have shown that they are willing to pay $80/month for pay TV.

On the international side, DirectTV has proven that South America can be a big market as they grew their Latin America subscribers to 7m+ in 5 years.  Their satellite operation allowed them to have wider coverage for their service.  I am not convinced that the internet infrastructure in Latin America can reach many potential subscribers to be Netflix’s growth engine.