Pattern Recognition, by Ian Sigalow

The Power of Netflix

Introduction

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Ian Sigalow

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.


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The Power of Netflix

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I attended a video round table last week courtesy of our friends at Valhalla Partners, and the first topic of conversation was about how Netflix is changing the content industry.  Netflix is an amazing company and, for those who don’t follow it, they have 23.6mm subscribers today.  That number grew 69% in the last year.  If you believe Reed Hastings the company will soon reach 100mm subscribers.

I am a Netflix subscriber and I have been for years.   Before I got married I didn’t subscribe to cable television at home and just used Netflix for television and movies.  The only thing I missed was live sports, and for that I would go to a sports bar and watch the game on TV.  I would be happy to cut the cord again, but I lost that vote and now we have 2,000 channels of linear television, of which we watch about seven, at a cost of over $100/month.

The thing about Netflix is that their figures are even more impressive than they let on because they have a lot of hidden users.  For instance, my wife and I each had separate Netflix accounts before we got married, but once we moved in together we cancelled one of the accounts.  The average household in the US has 2.6 people, so the 23.6mm Netflix “households” today equate to over 57mm people with access.

What does that mean for the movie and TV industry?

A basic Netflix subscription costs $7.99/month at the household level.  At the individual level this comes out to $3.00/month/person.  The content companies get roughly 35% of this money, so Netflix has somewhat arbitrarily set the value of all the world’s content (or at least all of it they can aggregate) at $1/month/user.

There are no commercials on Netflix, so all of the money comes from subscriptions.  I can watch this content on every connected device I own – ipad, Xbox, PS3, computer, TV.  I can watch it 24 hours a day, 7 days a week, without paying anything more than my fixed fee.  And it includes so much content that I can watch it for the rest of my life without ever watching the same piece of programming twice.

Just to sum this up, I get a lifetime supply of content at my fingertips for $1/month.  Now compare two points:

1.) The movie industry spends ~$10bn/year in the US making movies. That is about $30 for every person in the US every year.

2.) The TV industry spends even more – let’s assume it is $100/person/year if you take out live sports. (Note: the BBC charges $220/year for every household in the UK, which is the BBC’s cost of production, and they are a tiny subset of this market.  For all I know this number could be $500/person/year, but the point I am making works fine at $100/year so let’s run with that).

One last assumption, let’s assume that there are 15 “years worth” of movie and TV content on Netflix right now.

My quick math is that at a new Netflix subscriber gets a product that cost thousands of dollars per person to make for $1/person/month.  Further, every month of new content added to the system costs an incremental $10 per person, for which the consumer pays another $1.

Assume for a minute that Reed Hastings is right, and Netflix eventually gets into every house in America, would you want to be in the content business?

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Ian Sigalow

http://sigalow.com

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

Comments
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    AUTHOR DavidLarkin

    Posted on 7:59 am June 17, 2011.
    Reply

    One caveat to the juggernaut Netflix streaming model but it is a big one. The selection of streaming movies, with a few high profile exceptions that Netflix makes sure to put on their front page, is not as we say, au courant. It’s a lot of mediocre indie films, some excellent foreign films and lots of good longish tail TV. Rights holders of movies who think they deserve more that their share of the $1 a month you calculate goes to them, will not have their movies on Netflix for streaming, which is most of the big or very well reviewed mainstream fare. When Netlfix first got rolling they had a green field, but new entrants in the streaming market, YouTube, Vudu, etc., will keep some price pressure going via competition for high profile content as well, so it is unlikely that will change. That said, it’s the best $7.99 value going.

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