An Ignoble Experiment

Even as Netflix (NASDAQ: NFLX) announced it was expanding to six more European countries in late 2014--Germany, Austria, Switzerland, France, Belgium and Luxembourg--its chief financial officer, David Wells, told investors that the online video provider would stay in line with or slightly behind its overall revenue while continuing to expand its reach and content offerings--and that Netflix's international operations would be profitable by the end of 2014.

Wells

"We have a good chance to do that on a consolidated basis," Wells said in response to a moderator question about its international profitability, during a presentation at the J.P. Morgan Technology, Media and Telecom Conference in Boston.

Part of that profit will be driven by Netflix's price increase for its standard streaming package. New subscribers will pay $1 more per month in the United States, £1 more in the UK, and €1 more in EU countries. Existing subscribers will not see a rate increase for two more years--except in Brazil, where current subs will be grandfathered into the increased price after just one year.

Wells said that Netflix would keep its spending in line with its revenues, and that it would likely split the additional revenue rolling in from the rate increase between investing in additional content--both licensed and original--and expanding its margin.

The gradual price increase along with a conservative attitude toward its spending, Wells said, gives Netflix "latitude to step back and look at … (the) next five years and what's significant" to its growth strategy.

Wells stayed coy on how much the provider plans to spend as it expands into Europe. "Over the next three weeks you'll get a confirmation," he said.

He added that worldwide, there are over 700 million broadband households in addressable markets. "What you're left with is Netflix is addressing a quarter to a third of that market," he said, noting that there are "plenty of expansion markets where we think Netflix will be a viable player."

Still, though Wells was keeping things on a positive note for investors, content acquisition appears to be more worrisome to Netflix than the company is letting on. In a new market, "(the) two biggest costs are content and marketing," Wells said. "Marketing tends to peak in that first quarter … you're building a market from scratch. Content depends on the characteristics of the individual territory."

While saying that Netflix has been able to compete in Europe and especially the UK market, locking in content deals may be a challenge. Wells stayed upbeat about the issue. "Maybe incumbent players are trying to lock up rights, but it's extremely difficult to try to suck up all the content oxygen out of the air."

"Our intent is to continue to expand content library," Wells told investors, noting that in order to address its target of 60 million to 90 million subscribers in the U.S. alone, Netflix will need more content. A key part of its strategy is "offering more exclusives and more curated offerings," he said. "There's still great content out there."

For more:
- Netflix has this press release
- listen to the webcast
- BTIG has this post (reg. req.)

2. DirecTV, AT&T merger will 'redefine the video entertainment industry'

By Samantha Bookman

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Calling DirecTV (NASDAQ: DTV) the best video provider in the business, AT&T (NYSE: T) CEO/Chairman Randall Stephenson made video delivery across all screens--television and mobile devices--a key point in an investor call discussing its $48.5 billion acquisition of the satellite pay-TV provider.

"This is a unique combination. No other company will have a nationwide mobile footprint, a nationwide video footprint, a broadband footprint as extensive as this one. … This will redefine the video entertainment industry," Stephenson said.

"We've had on and off conversations about the industry and whether it makes sense to put these two companies together," Stephenson told investors and analysts on the call Monday. "The whole idea, the vision of delivering video on all screens: The more we looked and evaluated, we knew we needed to be scaled in video."

"We think we landed on the best video player in the United States. They have the best brand, the best video customer base of anybody in this industry," he added.

DirecTV President and CEO Michael White echoed Stephenson's comments, citing the evolution of broadband technology, particularly wireless broadband, as a factor in the merger decision. "Clearly some things have evolved over the last year and this year … the ability to do the technology is one of those things," he said. DirecTV has been utilizing fixed wireless local loop technology to bring broadband services to its customers in Latin America, and it feels that WLL can be used to affordably bring faster broadband--and multiscreen video--to underserved rural areas of the United States as well.

AT&T's growing 4G LTE network would be an important factor in boosting broadband capabilities in those areas, he said.

Another piece of the pie is content, something Stephenson feels DirecTV has managed well over its satellite network. "The ability to deliver content to mobile devices involves separate arrangements. I have little doubt that to offer the services will require additional discussion with content folks," Stephenson said.

White added, "Mobile (in) the future has got a lot of video in it. You've got to have the rights, and at a competitive cost," he said, noting that those rights have to be negotiated for many different delivery platforms, both over-the-top and through AT&T's U-verse service and the DirecTV satellite service--which will continue to be a standalone offering for the next three years.

Both feel that the size and reach of a combined AT&T-DirecTV will result in content deals for both linear and online video that are in their favor. Ultimately, the combined companies hope to present a more integrated video platform for subscribers, with the same features available both in the home and on mobile devices outside the home.

"We expect with our collective scale we will find opportunities at a more competitive content cost than (we) would otherwise ever have gotten," White said.

"There's money to be made for both sides," Stephenson added. "I think a lot of new models will emerge as a result of this."

For more:
- listen to the webcast
- the Dallas Morning News has this post

Read more about: content acquisition, AT&T
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3. Comcast, Apple wade into the CDN waters

By Samantha Bookman

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Cable operator Comcast (NASDAQ: CMCSA), which recently signed a peering deal with Netflix (NASDAQ: NFLX) to increase the amount of bandwidth the online video provider can use to reach subscribers on its network, has launched its own content delivery network (CDN) without fanfare. Meanwhile, Apple (NASDAQ: AAPL) is moving forward with a CDN buildout of its own and is negotiating paid interconnect deals with a number of unnamed ISPs, according to StreamingMedia.

The moves put competitive pressure on third-party CDNs like Akamai and Limelight Networks.

While not providing a "fast lane" to commercial customers in the way that its Netflix deal does, the CDN enables Comcast clients to store and have their content delivered via the last mile, a blog post by StreamingMedia VP Dan Rayburn explained.

"While this is the same type of CDN service that other commercial CDNs like Akamai already offer, Comcast can offer a very good SLA and pricing, since they own the network," he wrote.

While fast lanes have been a thorny issue in the ongoing regulatory debate around net neutrality, Apple and Comcast's moves aren't surprising--rather, they're part of a continuing industry trend.

"Much like Microsoft, Google, Facebook, Pandora, Ebay and other content owners that have already built out their own CDNs, Apple appears to see paid interconnect deals as simply part of the costs associated with building out their own CDN network," Rayburn said.

Apple's traffic takes up only 2 percent of Internet traffic, Rayburn wrote, but that bandwidth skyrockets whenever a new operating system for its iPhone is released. Last year, iOS 7 and related app downloads accounted for a spike to 40 percent of network traffic overnight following the operating system's release, he said.

Additionally, Apple's iCloud and streaming services need a boost, according to Jonathan Kizer of 9to5Mac. "iCloud infamously has had performance issues, but it also helps to put servers closer to users. Even with data centers on both coasts, Apple is still a long way away from most of its customers."

But not everyone agrees with Rayburn's analysis that Apple's deals are just part of doing business. GigaOM's Stacey Higginbotham wrote that "the bigger issue is the secretive nature of how content is exchanged on the internet at a time when a number of the significant content and broadband players are consolidating."

For more:
- StreamingMedia has this blog post
- and this post about Apple
- ars technica has this story
- GigaOM has this story
- 9to5Mac has this story

4. Yahoo may add RayV to online video acquisition pile

By Samantha Bookman

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According to sources familiar with the matter, Yahoo is close to acquiring online video startup RayV--a purchase that may help shore up the technology behind its own video efforts, The Wall Street Journal reports.

Los Angeles-based RayV, founded in 2006, spent its first six years developing software to improve streaming of HD video over the Internet and to mobile devices before launching its services in 2012. The software suite includes a content distribution network along with digital rights management and a content management system.

The startup has raised more than $40 million from investors including Accel Partners, Dragon Ventures and others, and has an R&D operation in Tel Aviv.

Neither Yahoo nor RayV would comment to WSJ on the matter, and details of the potential deal weren't available.

Although it's made over three dozen small buys since CEO Marissa Mayer took the reins in 2012, Yahoo's acquisition success has been mixed over the past year. Its bids to acquire DailyMotion, in France, and Hulu did not pan out. However, it is still in talks to acquire white-label provider News Distribution Network for a reported $300 million.

Yahoo is also moving forward with more original content on its online video service, Yahoo Screen, which launched last September. Last November, it signed anchor Katie Couric as "the face of Yahoo News." The provider in April renewed its relationship with music video service Vevo to help boost views.

For more:
- The Wall Street Journal has this story

5. Report: YouTube may buy Twitch for $1B

By Samantha Bookman

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