Netflix Benefits as Gamemakers Cut Prices

• ByJason Notte, Staff Reporter
• On 11:31 am EDT, Tuesday October 20, 2009

LOS GATOS, Calif. (TheStreet) -- When Sony cut the price of its PlayStation 3 to $299 last month and doubled its sales, the first thank you note should have arrived in a red envelope.

The move prompted Microsoft to cut $100 off the price of its Xbox Elite to protect its second-place market share, behind Nintendo. Suddenly, Netflix's agreement to stream movies exclusively through Xbox consoles became more promising.

The price war boosted Xbox sales 64% to 352,600 units last month compared with August, according to new data from NPD Group. While Xbox trailed Nintendo and Sony sales, its gain will likely benefit Netflix, which has gained 1 million new subscribers since it started offering content through Xbox Live in November.

With nearly 10 million subscribers and a 36% share of the video rental market, Los Gatos, Calif.-based Netflix is positioned to take a bite of the 45% controlled by Blockbuster and other video stores. Blockbuster disclosed in government filings last month that it might shed 20% of its 7,000 shops, converting some to kiosks.

Blockbuster is looking to its own DVD mail service and rental kiosks to stanch the bleeding, but going after Redbox's 22% share of the struggling rental industry seems dubious at best. The Coinstar subsidiary is mired in lawsuits with major studios over its cheap DVDs. Wal-Mart, meanwhile, plans to scrap DVD and Blu-ray display space amid a more than 13% drop in DVD revenue for the first half of 2009.

Though DVD rentals rose more than 8% during the same period, according to the Digital Entertainment Group, the discs are being outdone by the double-digit growth of streaming services.

Netflix, whose shares have more than doubled in the past year, has been locking up agreements with Roku, TiVo, LG Electronics, Vizio and Samsung to offer its service through their televisions and receivers. The company will likely face challenges from Amazon, Apple and Google's YouTube. Granted, Netflix can't stream high-definition video yet, but competitors like Apple and Vudu haven't come up with the bandwidth to do so either.

Netflix's biggest competitor may be the studios, whose wrath it escapes through payment agreements and a loophole in its partnership with Starz.

"Netflix has a big problem with the studios, and the quality of the streaming is somewhat improving and somewhat not," says Mike Kaltschnee, founder of the Web site Hacking NetFlix. "On some titles, they're missing episodes in the middle of seasons so the studios can still have leverage. The biggest risk they run is that the studios decide they want more of the money."

The Xbox 360 has been almost alone in courting Web content. Sony denies PS3 users access to Hulu and promotes its private video library and Blu-ray format -- doubling as a Blu-ray player is still a key PS3 selling point. Unless users pay $40 for PlayOn software to access Hulu, ESPN and other online video content through the PlayStation 3 or Wii, the Xbox is the only means of viewing such content through a gaming console.

Even as it prepares to offer Facebook and Twitter through Xbox Live, Microsoft shouldn't consider itself the iPhone to Netflix's AT&T. Netflix Chief Executive Reed Hastings recently told Reuters that he'd like to see Netflix in "all the game consoles, all the Blu-ray players, all the Internet TVs." While Microsoft views the Xbox as a bargain-priced, all-purpose entertainment device, Netflix may see a small star in a much bigger universe.

"I don't think the Xbox price drop is going to have as dramatic of an effect at the fact that Netflix is being baked into everything," Kaltschnee says. "I'm looking at Blu-ray players right now that have Netflix, Blockbuster and YouTube inside plus Wi-Fi for $200. Not everybody's going to buy an Xbox. My dad wouldn't buy one."

-- Reported by Jason Notte in Boston.

Buzz up!