The gradual progression away from physical DVDs to streaming content is also a shift in negotiating power to the content providers. The price point for a sale of a DVD is capped by the retail price, and Netflix can reuse the same DVD as many times as it wants, making it very profitable. It’s clear that non-physical, all digital content will not follow the same “first purchase doctrine” rules. Content providers demand a fee per each and every usage which will cut deeply into Netflix’s revenue model. The blind spot in Reed’s model is the fact that he offers a service – not a product (the product belongs to the movie studios – Netflix is just a delivery method). This service is dependent upon the pipe into a person’s home. Too little bandwidth and the person won’t take advantage of the streaming upon which the future of Netflix is dependent.Also Bandwidth cap by ISP's kills streaming model for Netflix. On the flip side – in a FTTH situation the person who runs the fiber will own the home. Nobody is going to run a fiber to a home that already has one. Netflix needs to partner with these broadband providers whenever possible – yet I see no planning on Reed’s end to engage these people. An independent telco, municipality or other entity who runs FTTH has no incentive to work with Netflix. If Amazon or WalMart created or improved their Affiliate programs then these broadband providers would have incentive to work against Netflix. Drop Netflix and join Amazon’s service and get your first month of Amazon’s streaming service free plus $10 off your IPTV bill. Sign up for WalMart’s streaming service and get your first month free plus a $20 WalMart gift card. You get the idea.
If a similar service to Netflix arrives and this new service has put these partnerships in place – then that new service will eat Netflix’s lunch in the broadband providers service area. That new service could even come from BlockBuster. How ironic would that be? I’m working on a couple of IPTV deployments and right now and Netflix will be part of those plans but a partnership with a new Netflix-type service provider that pays commissions to the operator or provides a widget on the TV could easily make Netflix obsolete.