Apple TVIn addition to the new iPad release yesterday, Apple also introduced a new Apple TV set-top-box (STB). The new STB didn’t add too many new features, so it was greeted with somewhat of a yawn by the tech industry.

But one new feature caught my eye. The new feature adds Netflix to the iTunes marketplace. On the surface, this move seems to be not too big of a deal. After all, Netflix has been available on OTT STBs like the Apple TV, Roku and Boxee platforms for years. The key difference here though is how the money flows.

Historically, subscribers to Netflix had to establish a billing relationship directly with Netflix, regardless of the platform they used to access it. With this new arrangement, Netflix billing is now handled by Apple’s iTunes store, meaning to the consumer, a separate billing relationship is not necessary with Netflix. Apple and Netflix have some type of billing relationship to ensure Netflix gets paid for Apple TV customers who access Netflix through iTunes.

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That creates a very interesting relationship, worth noting. I’ve always felt that one key hurdle preventing OTT video from having an impact on the subscription pay-TV service was the billing relationships. OTT subscribers have to establish multiple billing relationships with multiple providers to access OTT content. Want Netflix content – pay Netflix. Want to add Hulu Plus to that, pay Hulu. Want an HD movie on demand from Vudu, then pay Vudu. Today’s customer needs to manage and track all of these different billing relationships. That’s a pain.

Contrast that with the one bill that is paid to the cable, DBS, or telco service provider for all of their video content. The billing clearinghouse function provided by traditional video service providers offers tremendous value to end customers.

OTT content providers have not historically offered that value. But as Netflix just demonstrated with Apple, it may be coming. Netflix is now pursuing cable MSOs for carriage partnerships. In so doing, they would probably surrender the billing relationship to their cable MSO partners, and begin to look like other cable channels, namely HBO, who Netflix sees as a main competitor.

The above cable MSO approach for Netflix is interesting. But a more interesting future, one that would have more competitive implications, is the emergence of an OTT subscription offer that also acts as the billing clearinghouse. An offer with one bill to pay for multiple OTT subscriptions. That looks more like today’s subscription TV model, and may entice more people to cut the traditional cable TV cord. We may have seen the first move in that direction, courtesy of Apple and Netflix.

It makes the widely rumored Apple TV launch, expected later this year, more interesting. Who better to offer this new OTT subscription service than say Apple, Roku, or Boxee? The device manufacturers seem to be in a better position to do this, than the traditional video service provider. Such a future may make cord cutting easier and more palatable to a wider audience.

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12 thoughts on “Apple, Netflix Offer New OTT Approach

  1. Bernie raises some interesting points here. I agree there is a need for a single billing provider for OTT video–& I would argue that Apple is in the best position to play that role. The rise of iTunes has been a lot like the rise of Amazon. Both Apple and Amazon developed great on-line commerce platforms. Amazon started with its own on-line bookstore but now dominates the market for on-line sales of all sorts of hard goods from all sorts of vendors. I would argue that iTunes is well positioned to play the same role in the world for products that are not hard goods but are downloaded. The company should easily be able to expand its focus from music for the iPod to a broader range of content destined for a wider range of devices–as long as it doesn't get too greedy in its deals with content providers.

  2. I do agree with your point here, but I just noticed today while working through an issue with a settop box that I can use a Walmart.com ID to setup and use Vudu.

    It doesn't make the issue any different since Walmart purchased the company, I just thought it was strange that I could use my login to an account that doesn't keep a credit card on file.

    Netflix desperately wants to change their revenue model to one that is less transparent to their users. Cable carriage or a type of access billing like ESPN360 is their stated goal so they won't have to go with the PR debacle of publicly changing rate structures again.

    They would love to have it where every ISP/Cable customer would have to pay $4.50 or $6.10 for access to their content rather than 5% of the people pay $9.95. Plus they get to avoid B&C costs.

    1. Thanks for the insight Robert. Interesting point about Walmart. Their ownership of Vudu does create some interesting propositions for Vudu and OTT in general.

  3. I think nflix and others are more interested in cable mso deals. Gives them millions of subscribers quickly. Building their own ott subs model takes much longer.

  4. Netflix views HBO as a competitor? Hilarious. Sort of like the Albanian Army viewing the U.S. Army as a competitor. Netflix certainly is making a lot of public noise about figuring out its Act Two and no wonder about that. With the demise of their incredibly favorable Starz deal (paying about twenty cents/sub.month for all those movies while Comcast & Co were paying about $2/sub/month) the days of nifty profits Netflix was able to generate from their "all you can eat for one low price" business model are over. This propelled Netflix to 25M subs and a large pile of Monopoly money which they are now spending on content acquisitions to fill the hole Starz left. The dilemma is that this doesn't "fix" the fundamental problem with the "all you can eat" biz model. They need new revenue streams for sure and it will be interesting to see what strategy they come up with…but I'll give you odds the Albanian Army ain't gonna win against the U.S. Army ;-).

  5. Kind of an interesting argument. I guess it depends on where you are in the value chain. Content providers see the Internet as a way to get directly to consumers and bypass the MSOs. In some regards they want that direct billing relationship so they can gain more margin. Netflix has the direct billing relationship, but now wants to interject a distributor to get in the middle of it. What's good for the goose may not be so good for the ….

  6. The issue is original content. HBO has such a lead on Netflix, I'm not sure they can catch up. Think Sopranos, The Wire, etc. The dynamic film makers want their stuff on HBO, not Netflix. I don't think Netflix has deep enough pockets to compete with HBO for original programming, and that's where the war will be won – original programming. Good luck Netflix,

  7. It's a shame netflix in the UK pales in comparison to the US version. In the UK I had the free trial, and they've mostly got tv shows, and a very few amount of good movie. The thing I watched most on it was Scrubs, and the Netflix version didn't ave the license to the original music, so some scenes seemed out of place, and it was only up to series 5. I think if Apple TV had lovefilm in the UK, then it would be an even better buy.

  8. I don't own a single Apple device. Not sure I ever will. Their proprietary-or-die attitude bugs me. As a long-time PC user, I like "open source" solutions to a lot of tech problems and Apple just seems to dead-set against that. Turns me off big time. I'll stick with my satellite TV until something better comes along!

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