Netflix made a big splash today with their announcement of a $100 set top box, built by a California startup called Roku, that streams free movies (for Netflix subscribers) to the living room.

Good for them. Instead of wading into a losing battle over cheap downloads and rentals (see Vudu, BlockBuster, AppleTV, Google, etc., which charge for each movie), they jump right to free. They know what the consumer wants.

Of course, the service isn’t really free. Users have to buy the $100 box, and continue to keep a Netflix subscription active ($18/month). There are 10,000 movies available on on the box, which is significantly less than the 100,000 or so titles on Netflix’s DVD mailing service (and it’s old titles, not new releases). But it’s also an order of magnitude more titles than are currently available on demand via Comcast, my cable provider. And just like Comcast and the other cable guys adopted Tivo’s DVR functionality into their boxes before Tivo could do much damage, look for them to eventually copy Netflix, too, and offer a much wider variety of on demand content.

Netflix is taking a big financial hit with this service, which originally launched via PC viewing only and has since expanded. Last year they said they were putting $40 million/year towards licensing and overhead costs.

But really, what choice do they have? BlockBuster is gnawing away at one side of their business (physical DVDs), while online services (and don’t forget BitTorrent) come at them from the other end. And now the cable companies will be focused on them, too.

It’s a wonder Netflix continues to flourish in such a hyper competitive market. They now have over 8 million subscribers, 21% more than a year ago, and 32% gross margins on their core business. Those margins have decreased somewhat, what subscriber acquisition costs have also dropped from $47 to just $30 per new member. But as long as they continue to give consumers what they want, they’re at least in the game.

Look for more devices with Netflix built in, including one from LG, later this year.

The Netflix Player by Roku is the first in what portends to be a long line of devices designed to download and stream movies from Netflix. While in its current incarnation the device is fairly limited, I can firmly recommend it with the expectation that the movie selection will improve.

How does it work? You buy the box for $99 and connect it to your TV via HDMI, composite, or component. You connect the stereo outs to your receiver or run out digital optical. You must have a Netflix account to make it work, but then you simply connect the box to the Internet via Wi-Fi or Ethernet, send a request to Netflix, and then type in a code in your Netflix account. The box is paired and you’re ready to add digital movies to the box.

The movies are mostly oldies but goodies. There were very few first-run titles in the mix but there were older seasons of some popular television shows like Weeds and The Office. Right now there are about 10,000 titles in the mix, enough to keep most die-hard movie fans occupied. The only problem is that some of the movies I really wanted to watch from Netflix — which are already available on DVD — weren’t available for streaming. This is not Netflix’s fault, obviously, but if you’re a first-run movie fan I’d stay away from the box until you’re sure the service is for you. At $99, the box isn’t prohibitively expensive and the technology may end up in televisions soon so questions about an external box might be moot.

Full story at CrunchGear.

After years of negotiating with the movie studios, Steve Jobs finally got them to agree to put their movies on iTunes the same day as they release them on DVD. Now, in addition to Disney—which has been selling movies on iTunes since September, 2006—Apple is distributing 1,500 films from 20th Century Fox, The Walt Disney Studios, Warner Bros., Paramount Pictures, Universal Studios Home Entertainment, Sony Pictures Entertainment, Lionsgate, Image Entertainment and First Look Studio. New movies can now be purchased for $15, or rented for $4 (older movies are $10 for purchase or $3 for rental).

Apple watchers have been expecting this for a long time. It announced a deal to distribute rentals in January, and even that leaked out beforehand. But both Amazon and Netflix already have their own movie download and/or streaming services. And both offer more titles—Netflix has more than 6,000 and Amazon has nearly 12,000. (Although, Amazon may be rethinking its Unbox service).

It was only a matter of time before the studios relented and struck a deal with Apple. They could only stand on the sidelines and watch Disney ring in the coin for so long. The idea of distribution windows is so Twentieth Century anyway. How long before movies appear online the same day they hit the movie theaters? Come on Steve, we’re counting on you.

With Toshiba’s announcement that it is to cease manufacture of HD DVD players, the High-Definition format wars are now over. With Blu-Ray left standing, some, such as Rob Beschizza at Wired are now saying that digital downloads will now kill Blu-Ray.

It’s an argument I want to support and many of you reading this will feel is a sound one, but it’s not going to happen anytime shortly. Here’s a few reasons why

Old Habits/ Age Dies Hard
I’m probably in the last generation who will ever remember a world without widespread computer use and internet everywhere. Younger generations (often called the “digital generation”) only know a world where anything can be accessed or downloaded at the click of a mouse button. To paraphrase many a politician, the young people are the future, and the next generation has nearly already abandoned CD’s, and physical media like DVDs and Blu-ray are next. But that doesn’t account for the many others who, as Rob Beschizza points out, already buy DVDs by the millions and will likely buy Blu-Ray now that HD wars are over (and as they did before DVD’s with VHS). Substantial generations have grown up with physical media, and this isn’t about to change tomorrow. Like music downloads though it will start to change, but like music that is going to take at least 5-10 years.

Access (or I want to watch movies on my TV)
I asked my mother the other day why she hadn’t downloaded something (legally of course) after she had purchased the physical media instead. Her response was simply that she didn’t want to watch it on her computer. Although many reading this will never give a second thought to watching video on their computer, there are still people who prefer consuming video on their TV sets. To be fair, HD on a 1080p 40″ TV set provides a better experience that on my 17″ Macbook Pro, although the TV set doesn’t easily come to bed with me.

There are ways of brining digital downloads to TV sets, but none have anywhere near the penetration yet to offer a serious alternative to DVD and Blu-Ray. Apple is now offering HD movie downloads via their Apple TV box, but try and find more than a handful of people who own an Apple TV. Others offer a similar service such as Vudu, and there’s even Microsoft Media Center, and yet none are mainstream. Until such time net or network enabled devices become mainstream, TV and physical media will retain the upper hand.

Broadband limitations
The US internet community cried long and hard when Time Warner announced it was considering capping downloads on its internet plans in January, and yet I’m sure most non-Americans reading about it would have simply said welcome to our reality. The problem going forward is the days of cheap unlimited internet access in the United States may well be coming to an end as more and more download video and use P2P services. The low cost of bandwidth itself was a historical quirk that came about due to the first dot com bubble. That extra remnant capacity is being used now, and the costs of increasing capacity will likely be passed on to consumers. If this means more capped internet plans that immediately puts a constraint on the amount of video that can be downloaded. Outside of the United States this is already the case with capped plans in many countries, restraining potential growth in downloads (simply users will only be able to download so much content.)

Combine this with the need for high speed internet access that isn’t universally available. Digital video will not become dominant where it takes hours, sometimes days to download, when users can simply rent or buy the title on physical media.

Conclusion
As I said in the introduction, I’m all for the supremacy of digital downloads. I own two net enabled TV devices, a Zensonic network DVD player that allows me to stream content from any computer in the house or my NAS drive to my main TV set, and I’ve recently added an Apple TV to my line up. I wouldn’t swap this setup, and yet I’m still in the vast minority. Blu-Ray will likely be the last big/ mainstream physical media technology ever and it will have a strong future. The various factors needed for mainstream digital downloading and viewing will eventually combine to finally kill Blu-Ray (and the domination of all physical media) sometime between 2010 and 2020.

Netflix will begin offering unlimited online movie streaming from a library of over 6000 movies to customers on their $16.99 plan starting Monday.

The move is said to be in response to the expected announcement by Apple CEO Steve Jobs at the Macworld Expo Tuesday that iTunes will offer movie rentals from most major studios. The expected price of the iTunes rented movies is $3.99 each, putting Netflix is a competitive position for high value regular movie watchers.

Netflix has previously offered limited movie streaming to its 7 million + customers, but capped the streaming access at 17 hours a month.

According to AP, the offer will not be available to Netflix customers currently on the $4.99/ mth 2 DVD plan.

Today, Netflix took another step away from its reliance on the U.S. Postal Service by announcing a partnership with LG Electronics.  Netflix wants to stream videos over the Internet right to your TV.  Already, Netflix customers can stream movies directly to their PC.   This partnership extends the service to their TVs. LG will bake Netflix’s video streaming service right into a future LG set-top box.  It is a move in the right direction, but think of this more as a technology proof-of-concept than a market-shaking new product entry.

LG Electronics is not saying much about its networked set-top box other than it will be available in the second half of 2008 and will include access to Netflix videos. The problem is that nobody is going to go out and buy a set-top box that can only let you watch movies from Netflix. Anyone who buys this set-top box will most likely buy it for another reason.  The ability to stream Netflix movies to their TV will be just a nice added bonus.

An LG electronics spokesperson told me that there would be other features as well, but would not specify what they might be. Some possibilities: a combo set-top box and Blu-Ray/HD-DVD player, a networked set-top box that streams video from other Websites besides Netflix, a Windows Media Center Extender with WiFi that lets you stream all your music, photos, and personal videos from your PC to your TV, or all of the above.

But no matter what bells and whistles it comes with, any after-market set-top box is a hard sell. Who needs yet another set-top box under their TV? People only have room for a few boxes in their living rooms, not to mention the hassles of wiring it up to a broadband modem that may be in another room. Until Netflix gets this feature integrated into the set-top boxes distributed (and subsidized) by the cable and satellite TV companies, it won’t make much difference to Netflix’s overall business. Netflix has indicated that this is just the first such set-top box deal and that it will try to strike more with other set-top box manufacturers. (Maybe it should talk to Google about including Netflix in Google’s secret set-top box project). Before it gets to critical mass, though, Netflix might have to pay for carriage on some of these devices, and it will take years for it to gain meaningful distribution in American homes.

Look inside the code of the latest version of iTunes (version 7.5), and you will find eight lines that speak volumes about Apple’s next move in video. Movie rentals and video-on-demand, it appears, are now baked into iTunes, just waiting to be turned on.

When Evan DiBiase bothered to look at the code of the new version of iTunes and compare it to the last version, these eight lines popped out at him:

rental-content

rental-bag

rbsync

source-rental-info

dest-rental-info

getvodaccountselectionlist

GET VOD ACCOUNT SELECTION LIST

supportsRentals

Apple has not announced anything on the movie rental or video-on-demand (VOD) front, but these lines suggest that these options may be turned on soon. It is not clear what the difference between a rental and a digital VOD would be. Perhaps the VOD option will be for Apple TV?

When it comes to movies, rentals are more appealing to consumers, who tend to watch most movies only once or twice and have been trained to rent them cheaply. Who wants to fill up their hard drive with huge movie file downloads that cost $9.99 apiece? (A digital rental would presumably disappear after a certain time, as opposed to a permanent download that you might be hesitant to trash after you watch it because you actually paid for it). Sounds like Apple is finally coming around to the realization that movies are for renting. Too bad Amazon and Netflix are already way ahead of Apple on the digital movie rental front.

We caught wind this morning of some new social features on the Netflix website. Members can now navigate to a “Community” section, which replaces an older “Friends” page.

According to the Netflix Community Blog, the company unveiled the new community section on July 30th and has been tweaking it significantly over the last couple of weeks. There are a number of community features so far:

1. Latest reviews stream that continually loads movie reviews in real time as people post them to Netflix
2. “Members’ Top 10 Lists” widget that displays user-generated movie lists based on what Netflix thinks you will like
3. “Unique in…” area that shows the movies that are uniquely popular in your hometown
4. Selection of strangers on Netflix who share your interests or are most “similar to you”
5. List of your friends’ recent activities with Netflix (what movies they have requested, whether they have been returned, etc.)
6. “Friends’ Quiz” that generates simple questions to test you about your Netflix friends’ movie-renting behavior
7. Friends’ Love/Hated area that shows the movies your friends loved or hated (pretty self-explanatory)

If you are a Netflix user, check out these new features and let us know what you think in the comments. The Netflix developers are also open to feedback, so head over to their blog as well to give them your two cents.

In light of our recent coverage of social networking platforms, Netflix appears to be implementing features that support the notion of niche social networking.

These developments also put Netflix in more direct competition with companies like Flixster that provide social networks for movie fans.

Thanks for the tip Joel Simkhai.

Netflix stock jumped up 5.66% today on rumors that the company may be in acquisition talks with by Amazon. The funny thing about public company rumors: when they affect stock prices, it becomes AP-reported news.

Netflix has been under attack from Blockbuster and others in recent years, although membership growth has remained steady and the company is profitable. A whole new class of competitors are emerging, though, that facilitate legal movie downloads. Netflix has entered that market as well, but at a cost of $40 million per year in licensing fees. It may be time to throw in the towel.

Last month I wrote a post called “Why I Am Breaking Up With Netflix” that outlined the reasons I was switching to BlockBuster’s Total Access after years as a loyal Netflix customer. BlockBuster’s new offering, which basically turns every mailed movie into a coupon for a free movie at any BlockBuster outlet, has been a huge success. BlockBuster now has 2.2 million members, adding 700,000 over the last two and a half months. In the arms race between the two companies, BlockBuster launched something Netflix has no answer to - intelligent integration between the website and BlockBuster’s thousands of retail outlets.

But now Netflix has fired back with a really excellent new service that could swing momentum back in their direction. This morning, a select number of Netflix’s 6 million subscribers will have access to a new Watch Now product that will stream television shows and movies to a Windows PC. The remaining members will be given access over the next six months. About 1,000 movies and tv shows will initially be available (including some hits - NBC’s “The Office” is included, for example). Studios contributing to Netflix’s new service include NBC Universal, Sony Pictures, MGM, 20th Century Fox, Paramount Pictures, Warner Brothers, Lionsgate and New Line Cinema.

The best part - it’s free.

Netflix is budgeting $40 million to cover licensing and overhead costs of the service over the next year, which will, by the way, wipe out most of their operating profit of $17 million or so per fiscal quarter. Unless of course this service results in millions of new subscribers.

The tv shows and movies will stream to a downloadable application, and viewing time will be limited based on what Netflix subscription plan the customer has. Subscribers to the $18/month plan, which is the most popular, will be able to watch up to 18 hours per month.

This will be significant competiton for the absolute avalanche of IPTV companies that have been announced lately. Expect YouTube, Joost and iTunes, Zudeo, CinemaNow, MovieLink and others, to all be competing for the same eyeballs with very different products.

Check CrunchGear for their take on the matter. See also HackingNetflix for a screencast demo of the product. Screen shots are below.

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I was a die-hard Netflix fan. Apart from when I lived in Canada or Europe, I’ve been a Netflix customer for the last five years. There is a very tanglible tingle when a Netflix movie arrives in the mail, packaged up in its red envelope. When I lived in Canada I missed Netflix so much that I co-founded and ran a Canadian copycat service called Zip.ca, that continues to do well in that market.

I learned a lot about how the business works. The biggest variable cost is the two-way postage. And so the best customers are the ones that don’t return movies that often. For the business to work, the average has to be less than five movies per customer per month. If customers return movies too quickly, your only real choice is to slow down their shipments. Netflix and all of the competing services have complicated algorithms that add a day or two here and there to the “received date” when customers return DVDs. One way or another, high velocity customers are slowed down. And if they leave, that’s fine. They weren’t profitable anyway.

I understand the rules, and the deal was still worth it. $18/month for three or four movies. But the bigger issue is that I have a mix of new releases and classics in my queue. Netflix would always (always) send the classics and never the new releases, regardless of how I managed the list. Again, that’s just their algorithm kicking in and maximizing my profitability as a customer.

But that opened the door to Blockbuster. I still go there on Tuesdays when the new releases come out to get the new stuff that Netflix won’t send. Netflix is a great service for library titles, and a terrible service for new releases. Netflix made the mistake of being quite happy with me going into Blockbuster every week to get the movies I couldn’t get at Netflix.

Blockbuster’s Total Access Service

Blockbuster has had a service that competes with Netflix for some time. I tried the service out in 2005. The main advantage was that they gave two free in store movie rental coupons per month with the subscription (it is now just one coupon). But the service felt slower than Netflix, and I cancelled the subscription.

But recently Blockbuster changed the service in a way that can really hurt Netflix. Movies received by mail can be returned directly at any Blockbuster store. You get a free rental on the spot, and Blockbuster still sends out the next movie in your queue. And yesterday they announced that the monthly coupon for a free rental can be used for movies OR video games.

This is all combined with the fact that Blockbuster terminated its late fees a while back, meaning that rentals can be kept at least a week before you have to deal with them charging your credit card.

So I cancelled Netflix and signed up with Blockbuster. I return mailed DVDs to the store, where I can get the new releases for free. And the mail service is great for the library titles that aren’t in high demand.