Analysis of the Online Video Streaming Industry with an Emphasis on Netflix By Lev Williams Kevin Warnke Nate Loop Chris Hong Josh Sheline 1 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Table of Contents 1. INTRODUCTION 3 2. HISTORY 5 3. OVERVIEW 8 4. TRENDS & CHALLENGES 14 5. EMPLOYMENT 24 6. FORECAST OF MAJOR ISSUES 33 7. CONCLUSION 42 8. WORKS CITED 45 2 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Introduction + 3 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix 1. INTRODUCTION The purpose of this report is to analyze the Online Video Streaming Industry, and specifically focus on the dominant service provider, Netflix. This business report will briefly discuss the history of the industry, an overview of the industry, expertly discuss the trends and challenges, observe the employment prospects and work environment, and give a forecast of the industries issues. While Online Video Streaming is clearly a new industry that has yet to mature, it has shown potential to completely change the way people traditionally view movies, and television shows. The first section of the report will discuss the history of how the industry started, and what significant events influenced Netflix’s decision to enter the online video streaming industry. Such events include the start of streaming with RealNetworks and the popularization by YouTube. The second section of the report will be a general overview of the industry, and discuss the key competitors in the industry. The overview will also discuss the exponential growth the industry has seen as well describe the impact that streaming has on people’s lives. The third section of the report will be the trends and challenges seen in the industry. This section will be exemplified by observing Netflix. Trends include global expansion efforts, subscriber growth, and the increasing amount bandwidth demanded by streaming. Challenges seen by Netflix include rising content costs, and increased competition. The fourth section of the report will discuss the employment prospects and work environment in the online streaming industry. This section will detail the problems of a rigid management structure in the online streaming industry, and attempt to support the argument for deregulation of employment policies. Again, Netflix will be the main research object. The fifth and final section of the report will be the Forecast of the Major Issues. Because online streaming is a relatively new industry and technology advances quickly, it is difficult to ascertain the path the industry will likely take in the future. The forecast will examine the options and possibilities that could transpire in the future. Our goal as a group is to analyze the online video streaming industry with an emphasis on Netflix. This analysis will provide valuable insight regarding the industry through an organized and effective manner. Through this business report, we hope to explain the major advantages and disadvantages regarding the industry, and provide further knowledge of the direction the industry is moving. 4 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix History 5 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix 2. HISTORY OF THE ONLINE VIDEO STREAMING INDUSTRY The very first instance of streamed audio over the internet occurred in a baseball game between the New York Yankees and the Seattle Mariners in 1995 by the efforts of RealNetworks.1 The concept of streaming would evolve into becoming one the most perennial uses of the future. How the Online Streaming Industry Got Its Start The success of the online video streaming Industry has been influenced by many factors such as the popularization of YouTube as well as the convenience that it brings. The idea of using the Internet as a medium for videos has been immensely popularized by the success of YouTube. Founded in 2005 by former PayPal employees Chad Hurley, Steve Chen, and Jawed Karim, YouTube has significantly grown into being one of the most prominent websites today.2 Through simply streaming videos and posting them online, people were able to watch a plethora of content provided by users themselves. YouTube made users used to the idea of streaming content online and there was clearly much potential in online streaming for businesses.3 The online streaming industry was heavily influenced by the emergence of Videos on Demand, a strategy by cable companies to navigate the convergence of film, cable and the internet as a platform and revenue stream.4 Videos on Demand allowed users to watch movies from homes at the control of a remote, similar to the convenience of streaming movies and TV shows through the internet. Videos on Demand was a new model for home video and a new feature for cable subscribers, yet it did not find the level of success that the online streaming industry has found.5 The first significant use of the online streaming of TVs and Movies first occurred with Netflix in 2008. In that year, Netflix offered a service that streamed TV shows and videos online through Microsoft’s Silverlight.6 The company that initially offered DVDs through mail rose to prominence and paved the way for the distribution of content from TV shows 1 "RealNetworks, Inc." Fundinguniverse Website, http://www.fundinguniverse.com/company- histories/RealNetworks-Inc-Company-History.html?currentPage=all, accessed February 2012. 2 “History of YouTube,” Article Alley, March 31, 2010. http://artlaco.articlealley.com/history-of-youtube- 1482289.html, accessed February 2012. 3 Ozer, Jan. "Netflix Everywhere: Sorry Cable, You're History." Wired Magazine, http://www.wired.com/techbiz/it/magazine/17-10/ff_netflix?currentPage=all, accessed February 2012. 4 Lucas Hildebrand, “The Art of Distribution: Video on Demand” Film Quarterly, Vol. 64, No. 2 (Winter 2010), pp. 24-28, via JSTOR, accessed February 2012. 5 Ibid. 6 Topolsky, Joshua, “Netflix Finally Brings Watch Instantly to Macs via Silverlight” Engadget, October 26, 2008, http://www.engadget.com/2008/10/26/netflix-finally-brings-watch-instantly-to-macs-via-silverlight/, accessed February 2012. 6 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix and movies through online streaming. online streaming quickly became a significant option of how TV Shows and Movies are now viewed today. Netflix pioneered the way Americans were accessing videos and movies through online streaming and reaped huge profits by doing so. Their move to start “Watch Instantly” proved to be extremely beneficial. In 2010 Netflix stock prices were at $175 a share from $29 in 2008.7 Netflix’s move into using online streaming as a major distribution of videos on demand was undoubtedly a key moment in the start of the online video streaming industry. Many companies such as Apple, Fandor, Best Buy, and Blockbuster quickly joined in hopes to achieve similar success. Companies such as Hulu emerged in hopes to compete in the trending industry. Through its relatively short history, it is clear that Netflix has dominated the online video streaming industry. However, with the increasing competition and upcoming challenges it faces, it will be interesting to see if there will be a dominant driver in the industry to shape its growing history. 7 Netflix, “Netflix’s Investors Relations – Historic Stocks Lookups,” Netflix Company website, http://ir.netflix.com/stocklookup.cfm, accessed February 2012. 7 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Overview of the Industry 8 Analysis of the Online Video Streaming Industry with an Emphasis on Netflix 3. OVERVIEW OF THE ONLINE VIDEO STREAMING INDUSTRY The way movies, television, and music can be viewed, and listened to have literally changed in front of our eyes. The online streaming industry is currently evolving at a rapid pace, and shaking up the market shares of previously well established companies. We are currently living and experiencing the transformation into a digital age in which movies, television, music, photos, games, ‘apps’, and any other form of media can be downloaded directly to one’s computer, cellphone, or tablet. The online streaming industry is still considered a recent innovation in media consumption, and has expanded at an exponential pace. We will focus our research primarily on the online streaming of movies but will continue to research the entire industry, including, but not limited to, movies, television, and music. The online streaming industry has numerous competitors for each genre of digital media. However, we will focus our case study primarily on Netflix for the streaming of online movies and TV shows. Although we recognize that online streaming has other major contenders such as Hulu for online television, Amazon Prime for Movies, and YouTube for online music and miscellaneous content, we will concentrate predominantly on Netflix. The online streaming industry has had profound effects on: production companies, movie theaters, television stations, cable companies, record labels, and the manufacturers of DVD’s and CD’s. We will direct our attention to these effects, as well as the changes companies are making in order to keep up with online media and maintain their current market share. For example, Blockbuster’s shift online, and Redbox’s employee-less movie rental stalls. The online streaming industry is still expanding, and yet it is already enormous, almost beyond measurement. Less than ten years ago one would have to physically go to a movie theater or video rental shop, whereas presently one is able to stream any media imaginable from your computer or phone. This shift is quite a phenomenon. The streaming of media was recently seen as a luxury, yet is now critical to the success of a multitude of companies. Streaming media was once used solely for entertainment purposes, but is now seen as, “a vehicle for organizations to market, sell, and support their products and services, as well as for internal communications and training.”8 Streaming has become extremely important in regards to advertisers, as they can pay to play small clips of their product before or in between online content.