Netflix and the online video economy

The strong profit, revenue and subscriber growth Netflix announced Monday are encouraging indicators for the online video economy. Not only was the ramp-up of its streaming video service a sign of the viability of the market for high-quality streaming content, but it also showed that several other sectors of the market stand to gain from its success.

In its fourth-quarter and year end earnings call, Netflix revealed that it gained 700,000 subscribers to its DVD devliery/streaming video hybrid service in the fourth quarter. It attributed most of the growth to the internet delivery of movie and television content.

The first synergy created by Netflix comes from the deals it has with consumer electronics companies like Sony, LG, Samsung and TiVo to host its streaming service on their devices. Netflix pays marketing dollars to these companies when a device-buyer also adds a Netflix subscription, so the companies have incentive to offer compatibility with the service. Netflix gains by having a broader distribution network and better brand recognition than its online competitors like Blockbuster and Amazon.

Netflix even says it didn't mind Amazon On-Demand services being added to devices Netflix is currently on, because Amazon specializes in pay-per-view content heavy on new releases, while Netflix's subscription model relies more on a large library of older content. That sounds like a company that is confident in the niche it has created.

In addition to the profit-share of sorts between Netflix and the CE companies, Netflix's CDN partners also gain from the expansion of Netflix's streaming service. As more and more users decide to stream movies on a regular basis, Netflix requires more bandwidth for content delivery.

Also, online video technology companies also stand to gain from the evolution of over-the-top delivery of video content to the living room. While these innovations may not be market-ready currently, I'd imagine that some of the top players in this niche recognize the opportunity presented by streaming services like Netflix and are developing technology to optimize it.

I'm thinking specifically about technology like Move Network's dynamic streaming, which gauges a user's Internet connection in order to deliver the highest quality stream that will run seamlessly. A similar technology, geared for broadband-connected TVs and devices, could be a windfall both for the tech company and the content providers. The content providers would be able to provide a higher-quality service with fewer interruptions, and the tech providers would get paid for implementations of their innovations.

Lastly, content producers negotiate licensing deals with Netflix, so an increased audience for their content through Netflix's service will provide more residuals to them. Streaming services could provide a lifeline to struggling web series, which could partner with Netflix to build audiences for their programs.

The only losers from Netflix's success appear to be its competitors, namely Blockbuster and VUDU. VUDU laid off 15 percent of its workforce this week, which is a bad sign that its streaming offering has not caught on quite like Netflix's. Blockbuster hasn't released results from its set-top box movie delivery device, but its late entry and $99 price tag are likely barriers to its adoption. Netflix will certainly face stiffer competition going forward as others try to copy its success with streaming video delivery, but for now, CEO Reed Hastings and crew are flying high.

 - Pete