Written by Charles B. Slocum (From the December 2008 issue of "Written By") 

Last month, news reports touted several moves by Netflix that add up to a strategy to move ahead of the competition. The timing by Netflix looks shrewd.

The latest report announced that Netflix has struck a deal with TiVo to distribute streaming content to Netflix subscribers who also have an Internet-connected TiVo. This deal is good for both companies. TiVo created the DVR industry but has been overrun by cable-television-provided set-top DVRs that use competitor’s software. A few of these competitors offer a user experience that is similar to TiVo’s, but this has not been enough of an advantage to overcome the consumer aversion to buying a DVR when the cable company will rent them one for a nominal amount. In addition, the TiVo interface has not been upgraded in quite a while and some competitors, such as AT&T’s U-verse IPTV service, offer a better interface with almost as many features as TiVo’s. So, TiVo benefits from the incremental attraction that the Netflix service will bring to customers.

For Netflix, the TiVo partnership is also incremental. Not all TiVo customers can get the Netflix service. When DirecTV or a cable company provide the TiVo DVR, they will not enable the Internet connectivity that links to Netflix; they want their customers to buy VOD from their competing services. TiVo is not Netflix’s only path to the TV set, however. Prior to its new partnership with TiVo, Netflix had announced cooperation with Microsoft’s Xbox 360. What’s more, Netflix has two consumer electronics companies, Roku and LG, manufacturing Netflix-enabled set-top boxes.

There are other online providers trying to beat Netflix to the punch. The Amazon online video service was recently relaunched and was available on the TiVo boxes first. Roku and LG are also looking at adding other services to their hardware. And, of course, Apple has its Apple TV box bridging the gap between its iTunes service and the TV set.

With three platforms announced, Netflix is going for ubiquity. Look for Netflix to pop up on any Internet-connected set-top box that will have them. It’s a good strategy. Consumers want simplicity.

Netflix has two other strategic goals that it must reach to gain advantage over competitors. First, it must push as far as it can into high definition. They have started to offer some films in high-definition, but must pressure the studios to let them have more. Secondly, they have to pressure the studios to deliver as many films and television programs as they can get.

The Wrong Move

Consumers don’t want to pick the wrong service, and right now the offerings of the various services differ. The set-top Internet video business will not evolve like pay television, where most consumers get all or none of the movie channels and the channels split up the films. The set-top Internet video business is more likely to evolve like the online book business, where everyone goes to Amazon and not to the websites of individual publishers. Consumers want one-stop shopping.

No doubt, that’s what Netflix wants to provide consumers. But their competitors will get there too, so landing on as many different set-top devices as possible, and doing it first, is an important campaign for Netflix. One strategic advantage is the existing relationship that Netflix has with its customers. It will have an easier time migrating its customers from DVDs delivered in the mail to downloads than its competitors will have acquiring customers from scratch. Ask VuDu about that.

New Media reuse of traditional content can happen on the PC, on the mobile device, or on the TV set. The PC and the mobile device are likely niche categories. It is the TV set, in front of the sofa, where longer content such as films and complete TV programs will become big business. As Walmart cornered the market on DVD sales, Netflix is vying for the dominant position in Internet-delivery. They are making the right moves.

However, competitors will not stand on the sidelines and cheer. Microsoft hasn’t turned its Media Center software into a living room must-have yet. The software works fine, but is difficult to integrate with cable, something only TiVo has managed well. In addition, the Microsoft solution’s expensive, probably requiring a separate PC for the living room. If that is too geeky and too expensive, the VuDu and Apple TV boxes are too limited. Look for combinations with DVRs and Blu-ray players to make these stand-alone boxes more appealing to consumers. And look for price subsidies. Many consumers reject paying $300 for a set-top box that simply gives them the privilege of paying $5 per program on top of that. The Netflix subscription model, with software popping up on just about any box connected to your television that they can get on, is a good strategy. LG must have a Blu-ray player/Netflix box in the works.

Both the hardware and software providers in this Internet-to-the-TV Set space are multiplying and jockeying for position. There will be a shakeout, but that’s a ways off. The marketplace will gain complexity and players and business models for a couple more years before most fail and consumers have a clear, simple choice. For now, the best show available is the competition for who will get it right, at the right time, and at the right price.