Netflix To Offer Streaming Only Package, But Profitability Will Be Hard To Come By

On Netflix's Q3 earnings call, CEO Reed Hastings announced plans to take Netflix's digital offering international, sometime in the second half of 2010. Reed said Netflix plans to roll out a streaming only offering by starting small in one market, proving the model and then expanding into other countries. While such an announcement probably comes as no surprise to anyone and is simply the next evolution for Netflix, the company will have a difficult time generating profit from such a service.

Without any details on how much Netflix plans to charge per month for their streaming only service, you can't figure out their exact costs. But you can come pretty close. Between the prices they pay to the CDNs to stream the videos, which could be a bit more expensive overseas, and the price Netflix has to pay to license the content, users who watch enough movies each month would actually cost Netflix money. With some popular content, licensing and delivery costs can be as high as $0.50 per stream, if not higher. At fifty cents per movie, ten movies streamed by a customer just cost Netflix five bucks.

And how much can Netflix possibly charge for a digital only offering? I don't think they could try and charge more than $5.99 a month, which means Netflix is going to be playing the laws of average when it comes to video consumption. Netflix is going to have to hope that those customers who tax the system and stream a lot of movies each month end up being offset by a larger percentage of customers who only stream a few movies each month. That's a hard business model to forecast when you're trying to guess the consumption rate by consumers, for a brand new service. Clearly, that's one of the main reasons why Netflix is going to start small, in a yet to be announced region and use a lot of that data they collect as guidance for the business.

On the call Netflix said that 42% of their of their subscribers had streamed at least 15 minutes of video in the last quarter. While the number of minutes sounds really low per subscriber and makes it sound like a streaming only service would be profitable, keep in mind they broke out that numbers across nearly half of their subscribers. The real question is what percentage of minutes did the top 10% of their customers make up? My guess is that a much smaller percentage of the overall base of customers makes up the vast majority of minutes watched.

The other interesting part about this announcement is that right now, Netflix does not have the international rights to a lot of the content they stream in the U.S. I don't know what percentage of content is U.S. only, but clearly Netflix is going to have to make a lot of new licensing deals for content relevant to the territories they end up launching in. That alone would keep Netflix from having a large catalog of inventory at launch, which is probably the reason why they won't offer the service for at least another eight months.

It's going to be really fun to watch how this offering does in the market, what region Netflix launches in first and what type of consumption numbers they are willing make public once the service is up and running. This is going to be a great test for a lot of other content owners, like Hulu, who we know are going to launch a subscription based service shortly, and even mentioned today at a conference that it will be sometime next year.