Was Netflix wrong?

In a swift reversal, Netflix said that it had decided to keep its DVD-by-mail and online streaming services together under one name and one Web site, abandoning the breakup it had announced earlier.

Was Netflix right? Let us look at the facts:

Online streaming remains the core business for Netflix going forward.  The most disruptive technology in video today also offers the most opportunity for our industry. The sale of DVDs have been falling since 2007. Hollywood needs to plan for the fact that the DVD market has long since peaked, with some analysts arguing that consumers no longer feel the need to buy films when they can rent them online. 

Google, in a research paper published in April 2011, said that searching for pirated movies, with terms such as "free movies" and "movie torrent" peaked in 2008 and has dropped since. Searching for legal DVD-related terms is also down about 45% in the same period but, according to Google's internal data, searching for online rental has lifted off.

The Digital Entertainment Group noted that the subscription film business saw a 33% jump in revenue growth during the otherwise difficult first quarter highlighting that the future for Hollywood is in the download, not the DVD.

THe SNL Kagan research firm says that studio shipments of DVDs fell 43.8% in 2010. "Consumers are now opting to sign up for streaming and-or rental services" analyst Wade Holden wrote.

A Credit Suisse report issued on September 2011 concluded 20% of U.S. pay-TV subscribers may be inclined to cancel service because it’s too expensive.

According to Convergence Consulting Group, estimates that 2 million households in the U.S. will have abandoned cable TV for the Web. According to Convergence, 18 percent of viewers in the U.S. watched free, full episodes of TV on the Web last year, and that is growing by a percentage point every year.

So why does it make sence for Netflix to push the streaming model? On a per subscriber basis, last year Netflix only paid one tenth the amount for programming ($34/subscriber) as did cable and satellite TV providers ($359/subscriber). Half of Netflix cost of goods sold in 2009 was spent on postage and handling. The USPS is proposing a seven percent increase for media or library mail. A seven percent increase might not sound like a lot, but it could have a severe impact on Netflix’s business. 

With the introduction of the notion of “cloud computing”, the CDN community has experienced the growth of commercial computing and storage delivery systems. The biggest trend affecting the market over the past 12-18 months is the emergence of broadcast quality content being available through over-the-top services. Also, more downward pressure on CDN pricing is based on service providers fiercely competing for business. This makes Netflix's internet delivery more appealing than mail over the long term.