Analysis: Despite New Entrants, Netflix-CBS Deal Secures Spot At The Top

WASHINGTON, February 25, 2011 - Amazon’s new movie streaming service represents a first step into the market but it will be a while before it - or any other new entrant to the sector - challenges Nexflix at the top of the heap.

This week through its Prime subscription service, Amazon offered free streaming movies and television shows to its subscribers. Amazon will offer more than 5,000 movies and shows that subscribers can access through their computers, compatible Blu-ray players or set top boxes that Amazon has begun to feature on its website. This move represents Amazon's entry into the new and unstructured online video market.

Netflix, already a solid leader in the field, also stepped into a more prominent role this week with a new deal with network CBS. The deal, which is worth $200 million, will give Netflix users access current CBS hits as well as a substantial back catalog of classic CBS shows such as "Frasier," "Cheers,"  and "Twin Peaks."

These new deals leave Hulu - which made the initial mainstream foray into online video - with a large gap to make up. Hulu features content from  ABC, NBC, and Fox, but  has remained static since the launch of its premium site, Hulu Plus.  Nor does the company look to be building beyond some small additions since its beta in June. Hulu seems unable to build a larger catalog of shows, as its affiliated networks appear unwilling to license whole blocks of shows like those recently acquired by Netflix. Consumers have  also complained about the dearth of Hulu-compatible viewing devices, forcing them to watch shows primarily on their computers. The restriction on Hulu can be largely attributed to the networks, which have an incentive in the form of more advertising dollars to drive consumers to watch their shows on broadcast television rather than online.

Consumers also place a high priority on hardware and are more interested in watching television on their televisions through DVD, Blu-ray, or stand alone boxes, than they are on their computers. Netflix has been able to convince several manufacturers to build its service into their products. The result is beneficial to both parties as it makes the hardware more appealing and more versatile.  AppleTV, for example, provides a stand-alone player that enables rentals and downloads of video through the iTunes store, as well as a dedicated output to send content to users' televisions. AppleTV also allows users to access the Netflix catalog, but if other providers want to compete they may need to similarly appeal to  hardware manufacturers to build in their service into devices.

This week's announcements seem to show that Amazon, Apple, Hulu, and other potential providers have a long way to go if they are going to challenge Netflix' lead in online video streaming. So far Netflix is the only company with the content, delivery system and current market share to be a complete player in the online video market. Amazon has a certain amount of hardware support, but its catalog is too small and lacks widespread availability. Hulu doesn’t have enough control over the content it provides to make it widely available on all devices other than people's computers.

New players to the online video battle will find a high price of admission without strong content offerings to consumers. Netflix has found itself able to build not only a larger catalog, but also a more diverse one, encompassing Hollywood, television studios, and foreign production companies.  Market analysts agree that Netflix holds its sizable lead mostly due to its superior number of available titles and its already-entrenched mail subscription service.

“At this point," said Piper Jaffray analyst Michael Olson, "the only company generating enough revenue from subscription video to spend on an improving library without taking a significant hit to the bottom line is Netflix.”