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Netflix Roku: Free Is Such A Beautiful Word

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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.

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