3 Big Challenges Facing Netflix

Still in the wake of Blockbuster's Chapter 11 bankruptcy, Netflix is probably feeling pretty good about itself. While it's third quarter numbers won't be ready for about a month, for the second quarter it reported (.pdf) a healthy $43.5 million profit and 42% year-over-year subscriber growth. That kind of progress makes it very hard for a company to complain. But its competitive landscape is changing, and its road ahead will have new obstacles.

Blockbuster 2.0

Although the Blockbuster bankruptcy might seem like a huge win for Netflix, it isn't all good news. Its competitor is not gone -- just reorganizing. When a company goes to Chapter 11, it's a little like going through detox. It sheds some of its liabilities and costs, and ends up a leaner, more focused firm that can reinvent itself. Just ask General Motors.

So when Blockbuster emerges from bankruptcy, it won't be the same company that Netflix found so easy to smack around. That doesn't mean Blockbuster will necessarily triumph over Netflix, but Netflix can expect a different and more difficult challenge from Blockbuster going forward.

Streaming Tech Companies

The real future of Netflix is its streaming service. It has been doing pretty well extending its library of movies that customers can watch instantly, but it still has work to do. Verne Kopytoff of the New York Times today reports today, however, that its competition is fierce in this space:

Netflix faces a number of well-financed and innovative companies like Apple, Amazon and Google, as well as the cable TV providers. This time the war will not be won by the company that perfects the logistics of moving DVDs, but by whoever can best negotiate with Hollywood studios.

These are some companies that nobody wants to take on today. Given their incredibly significant presence in business these days, they'll also have some nice advantages when bargaining for content. Again, Netflix will have to be savvier than ever to negotiate better deals for streaming than these tech titans and cable companies.

Streaming Movie Studios

But that's not all: the house is also playing in this game. The movie studios themselves are getting into the streaming business. After all, why let a middle man like Netflix swoop in to take a cut of the profits for your content? Ronald Grover and Kelly Riddell at Bloomberg report:

Sony Pictures, Warner Bros. and Walt Disney Co. are in talks with the largest cable TV systems to offer films for as much as $30 per showing soon after they run in theaters.

The studios are talking with In Demand, a partnership of Cox Communications Inc., Comcast Corp. and Time Warner Cable Inc., Bob Benya, chief executive officer of In Demand, said in an interview. Disney is also discussing streaming films on Web- linked devices such as Microsoft Corp.'s Xbox console and Sony Corp.'s PlayStation 3, people with knowledge of the talks said.

Hollywood studios have been looking for ways to generate additional sales from movies as DVD purchases decline. A so- called "premium" service would let consumers see movies on TV without waiting as long as the typical three to four months for DVDs or cable companies' $4 or so on-demand showings.

While this is definitely a different business model than Netflix's unlimited streaming, the a la carte version of on-demand viewing will appeal to some consumers. Of course, if movie studios are planning on streaming themselves that won't make negotiating with them to stream their content any easier for Netflix.

Netflix has done a very good job keeping its business model crisp and fresh. It smartly anticipated the attractiveness of streaming movies while continuing to satisfy its customers who like to rent-by-mail and the ease of its online interface. But as the industry evolves, it will have to work even harder to maintain its edge in the movie rental market.