In a NY Times Bits blog post, Saul Hansell makes the case that Netflix may be in a great position as online video develops. His point boils down to the fact that Netflix has an existing business that acts as an on-ramp to the new services. Their DVD rental service transitions naturally to a stream-to-the-set-top-box model. But in a blog post today on The Business of Online Video, Dan Rayburn shot some holes in this theory
arguing that Netflix's streaming business loses money because they pay both for content and delivery. If the business you are transitioning to loses money, the transition doesn't work real well.
I tend to agree with Dan in the near term. The problem Netflix faces is essentially that their online streaming business model is that of a middleman in a sector that is eliminating many middlemen. And yet, Netflix must go where they are going, because DVD rentals will only decline as video moves online. They face the same basic challenge that Earthlink and AOL have struggled with - how to take a slowly dying but great cash business and leverage it into a new great cash business.
But let me pose a new scenario. What if Netflix were to go out and solve their problem? What if Netflix were to buy its own CDN? If you think about it, their DVD-rental business is already a primitive CDN, distributing data from centralized repositories to the customer using the US Postal Service instead of DSL or Cable. Why not use their cashflow to buy their way out of the middleman position in the internet video business? Is a Netflix/Limelight or Netflix/Panther combination unthinkable?