Consumers' insatiable love affair with streaming video -- at home and on the go -- is at the heart of Netflix's rebound and the continued rise of its competition.
Netflix is now used in one-fourth of U.S. homes, up from 20% a year ago, according to a new survey from consulting firm Frank N. Magid Associates. Amazon Instant Video's audience jumped to 8% of U.S. homes, up from 5%, the survey found, and Hulu rose to 5% from 4%.
Overall, more than half of U.S. homes (55%) now stream TV episodes and movies, up from 49% in 2011, the survey of 1,500 U.S. homes in November 2012 found.
"Netflix certainly is the de facto brand for long-form streaming," says Maryann Baldwin, vice president of Magid Media Futures, a division of the consulting firm.
"As more people discover Hulu Plus and Amazon Prime, their expectations for quality content are going to change because they tend to have the more recent content," Baldwin says. "The competition is making inroads."
Billions of dollars are potentially at stake: the U.S. streaming market is expected to grow from about $3.7 billion in 2012 to $6.7 billion in 2016, according to PricewaterhouseCoopers. As the adoption of faster home broadband services and connected TVs continues to stimulate the dynamic home video marketplace, streaming providers are vying with traditional pay-TV providers -- and each other -- to make their services stand out.
"If you look at Hulu's numbers over last year, they doubled from 1.5 to 3 million subscribers," Netflix CEO Reed Hastings said in a teleconference after last week's earnings were released. "People around the world are interested in Internet television because you can click, watch, pause, control (and) choose. It's just a better paradigm."
Homes with Net-connected TVs rose to 35% of all U.S. households in 2012, up from 30% in 2011, the Magid survey found. That trend is accelerating and should hit 42% of all U.S. homes by the end of 2013, Magid projects.
"Consumers ripped open those new Netflix-enabled electronics at Christmas and just kept on signing up," says Gina Keating, author of Netflixed: The Epic Battle for America's Eyeballs.
In recent months, Netflix has taken a multipronged approach to protect its lead and drive growth. The streaming service, which started renting DVDs by mail in 1998, became available on more devices, including the Nintendo Wii U.
As a result, it added 2 million U.S. streaming customers and 1.8 million outside the U.S. during the last three months of 2012, the company announced this week. That suggests that "the company has finally transcended subscriber anger" over its decision two years ago to split the DVD rental and streaming services, Keating says, "and has returned to its role in (customers') minds as a force for consumer-oriented change in entertainment."
To help offset the loss of content from Starz, which included Disney and Sony movies, and exclusive streaming of Epix content such as The Hunger Games, Netflix signed new deals with Disney, Turner and Warner Bros.
As studios play the growing streaming services off of each other and traditional pay TV providers, industry observers expect that area to heat up. A sign that content costs are rising: Netflix plans an offering of $500 million in senior notes to raise funds for content deals, expand and to pay off $200 million in outstanding notes due in 2017.
That's not necessarily a good move for Netflix, says Wedbush Securities analyst Michael Pachter. "They are deficit spending," he says. "One would think that all the Tea Party investors would get that."
Apparently, some agree as Netflix stock price dropped to $165.76 from a one-year high of $177.25 on Tuesday. The stock has been on the rise since last week's announcement that it had risen to more than 33 million streaming subscribers and seen a 7.8% rise in revenue ($945 million).
"It's interesting how quickly (Netflix) have evolved into similar challenges as the Comcasts and DirecTVs of the world," Baldwin says. "The content costs caught up to them pretty quickly. Content is still king."
Netflix has already begun growing its own content. Eight episodes of Lilyhammer, starring Steven Van Zandt, premiered last February and a second season is in the works. The new series House of Cards, executive produced by David Fincher (The Girl With the Dragon Tattoo) and starring Kevin Spacey, makes its debut Friday on the service. All 13 episodes are available immediately.
Other series coming: thirteen episodes of horror thriller Hemlock Grove (April 19), executive produced by Eli Roth (Hostel); A relaunch of the series Arrested Development, canceled by Fox in 2006, is set for later in May; the comedy Derek starring Ricky Gervais and Orange is the New Black with Jason Biggs (American Pie).
Hastings envisions a "virtual cycle" in which Netflix continues to add subscribers -- the goal is 60 million to 90 million -- allowing the service to expand its content library.
"Gain more subscribers and get more content, gain more subscribers, get more content," Hastings said. "And what propels our growth is that continuing content."
Netflix is sitting pretty, for now. Of all online video sources, it is the stickiest. YouTube has the most unique visitors, 133.7 million monthly, compared to 12.8 million for Netflix, according to Nielsen. However, the average time spent per month on the service is 11 hours, 31 minutes, followed by Hulu (5:54) and YouTube (4:52).
In the face of competition, Netflix is evolving, says Keating, who expects the company to make use of its user database to gather content that best suits subscribers.
"Netflix has moved away from its DVD-era mantra of offering the world's most complete library, and has repositioned itself as a programmer and curator of movies specifically tailored to each subscriber's unique tastes," Keating says. "This repositioning will help Netflix prune its content deals to include only shows and movies that its famous matching algorithms show will interest a decent number of subscribers rather than having the enormous expense of trying to offer everything."
By Mike Snider, USA TODAY
USA TODAY / Gannett