Netflix Trains Its Sights on Apple, Hulu Plus

By Mike Schuster Jul 22, 2010 12:40 pm

In yesterday's earnings call, CEO Reed Hastings announced a heavier focus on streaming TV shows.

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Relegated to the Pink Sheets at the start of July, Blockbuster serves as the perfect word of warning to every video-rental service. A big, flashing neon sign that reads, "This is what happens when you don't innovate!" Rental houses like Netflix (NFLX) and Redbox (CSTR) -- as well as the video-streaming divisions of Apple (AAPL), Best Buy (BBY), and Walmart (WMT) -- have Blockbuster to thank for being the quintessential example of what not to do.

Certainly, Blockbuster's delisting was the kindling to the fire lit under CEO Reed Hastings in yesterday's earnings call. But it was Hulu Plus that flicked the Bic.

The call was buoyed by a largely positive report. Although revenue was $4.6 million short of analysts' estimates of $524.4 million, earnings per share of $0.80 exceeded estimates of $0.71 and gross margins came in at 39.4% -- 1.6% higher than the previous quarter and 5.3% higher than the same quarter a year ago. Hastings reported a steady rate of new subscribers -- more than a million for the third consecutive quarter -- and that 61% of its users are now taking advantage of Netflix's streaming services. That's a jump from 51% last quarter and 37% a year ago.

It's much to Netflix's advantage that its Watch Instantly service has taken off and become a large part of its image. And as the red envelopes become as obsolete as the DVDs they contain, the company must rely on being at the forefront of streaming-video content. After all, Hulu Plus has launched, every iPad is connected to iTunes, and even Redbox is considering an expansion into online video. So Netflix really needs an angle to stay ahead of the pack.

But the company is known more for the silver screen rather than the boob tube. Unlike Hulu and iTunes, Netflix can't provide last night's episode of Hell's Kitchen. As such, Hastings made it a point to mention Netflix's focus on expanding its streaming-TV library. He said:

In terms of streaming content, we are rapidly expanding our TV shows available for streaming, and since our last call we have added thousands of TV episodes from new deals with Fox, MTV Networks and Warner Television. These shows include all seasons of 24, Futurama, Lie To Me, The Chapelle Show, Nip/Tuck, and Veronica Mars, and in a few weeks all seasons of The Family Guy will be available to stream as well. We see TV shows as equally important to our franchise as movies.

Regarding Hulu Plus, he said, "We take it seriously as a direct competitor."

And rightly so. Hulu is backed by NBC (GE), ABC (DIS), Fox (NWS), and is widely known for its fast and free TV library. And although Hulu Plus is off to a shaky start with some major kinks to work out, the promise of entire backlogs of episodes -- not just programs available on DVD -- is enough to lure users into forking over the $9.99 per month subscription fee.

Hastings also wishes to corner the market by maintaining exclusive rights to certain programs. "As we evolve from DVD by mail into streaming, the role of exclusive content changes." He elaborated:

"At this point we can start to afford some major TV shows and movies on an exclusive basis, and plan going forward on a mix of more-expensive exclusive content and lower-cost non-exclusive content. Our willingness to license some higher-priced exclusive content will open up new licensing opportunities for us."

If Netflix chooses to pay handsomely for exclusive content, taking shows away from Hulu, Apple, and any other streaming service, it could prove to be the deciding factor on which service users select. And given its huge push for mobile access through iPhones, iPads, Android (GOOG), and Windows Phone 7 (MSFT) devices, that decision might be even easier.Twitter: @mcs212