Netflix: Premium Cable’s Worst Nightmare

This week’s Bloomberg Businessweek discusses Netflix’s relentless expansion as the DVD-by-mail service makes even better use of the Internet.  Instead of relying on the US Postal Service to deliver its product, Netflix is increasingly streaming content online.  The company is perfectly poised to profit as the Internet continues to suck the television networks and premium cable into its maw.

Hollywood is having a hard time deciding if Netflix (NFLX) is friend or foe. The fast-growing movie service has already helped drive DVD retailer Blockbuster (BBI) to the brink of Chapter 11. Now, Netflix is poised to take on premium cable giants like HBO and Showtime. Last month, Netflix bought the rights to stream films from three studios. That will make it the first true Web-based movie channel. It already has 15 million subscribers and an ad-hoc distribution network that includes Web-ready TVs like Sony’s (SNE) Bravia, game consoles like Microsoft’s (MSFT) Xbox 360, and even gadgets like Apple’s (AAPL) iPad. That makes Netflix’s $8.99 a month mail-order and online service a threat to more-expensive premium cable channels. It also poses a quandary for HBO parent Time Warner (TWC), whose Warner Bros. studio has become more reliant on Netflix as a source of revenue as overall DVD sales have declined. Netflix “is a customer for our output, and it is a potential competitor to networks like HBO,” Time Warner CEO Jeff Bewkes said last month. “So far it has been more of a complementary service to HBO than a competitor.”

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Don Tapscott

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Don Tapscott, one of the world's leading authorities on business strategy, is Chairman of Moxie Insight. He was founder and chairman of the international think tank New Paradigm before its acquisition 2007. Read more about Don.