Follow up of NYC: Netflix Strategic Partnership
・Fact finding and comparative analysis on key contractual terms
related to Network Service, Content and TV businesses
Scope
of Work
Key elements:
- Release Window
- Richness in Content Lineup/ Category
- Profit and Loss impact
- Strategic Pros and Cons
Related businesses:
- SNE: Video network service, PSN
- SPE: SPE - Starz / Starz - Netflix
- TV: TV - Netflix (Netflix button on BRAVIA remote controller)
・Strategic options from the view of Sony Group’s holistic strategy.
Team
Set Up
・Project Owner： K. Hirai
・Related Executives: M. Lynton, B. Ishida, T. Schaaff, (R. Wiesenthal)
・Supporting Staff: [SNE] M. Aragon, C. Sheu [TV] Z. Namikoshi, N. Closey
[SPE] J. Underwood
[HQ] Y. Yasebe, H. Nagata, H. Takahara
January
Key
Milestone
3rd
W1
11th
W2
17th
W3
24th
W4
February
1st
W5
7th
W6
Today
14th
W7
21st
W8
1st
W5
7th
W6
14th
W7
21st
W8
28th
Fact finding
Analysis & Strategic Options
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March
| 2010 MRP
Reporting
February 17th, 2011
1
Impact to related business areas
There are 3 relationships needs to be considered and resolved holistically.
Discussion Points
1
SPE
2
SNE
3
Business Strategy Department
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(Video)
HE/PS3
| 2010 MRP
Starz
Netflix
Opportunities and risk ?
Competing or Complimentary
to Qriocity video services?
Business model can
create additional revenue
stream?
February 17th, 2011
2
1
Current SPE – Starz relationship
・License SPE Contents exclusively
- 220 titles (Pay1: 57, Pay 2: 3, Library 160)
- for 11 years from CY2005 to CY2016
- to Pay 1 and Pay 2 periods [*1]
SPE
Starz
・Sub-distribution deal to allow Starz to
offer SPE contents to Netflix
・220 titles licensed to Starz and 107
catalog features[*2] from SPE, out of 8,500.
Netflix
・Receive approx. 400M$ fees/year from FY13.
・Obtain most favorable terms of Starz linear Pay TV or subscription on-demand channel on Sony
internet platforms
・Bundle 2 “free on demand” titles per year with purchase of Sony products (>$100)
・Right for Sony/SPE to exhibit 6 titles (<$50m DBO) per year on our mobile linear Pay TV channels
[*1] two 13-18 month periods, the first starting 7-10 months post theatrical, the second starting 8-8.5 years post theatrical via linear subscription
pay television (cable, satellite) and subscription video-on-demand (cable, satellite, internet)
[*2] For watch instantly streaming service only
Business Strategy Department
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Strategy
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| 2010 MRP
February 17th, 2011
3
Netflix aspirations may threaten Qriocity service
•Netflix is gaining customer touch points in Living Room TV equal to “Pay TV”
•Will further grow in US with lower pricing and expand similar model globally
Analyst Comments
• We expect Netflix to have more than 19 mil subscribers by the end of 2010, (now has 20 mil)
representing about 6% of the US population or 17% of the estimated 116 million US TV households.
• Netflix is not far from surpassing Comcast subscriber base of 23 million cable subscribers. This would
make Netflix the US leader in “pay TV”, ahead of players like Dish, DirecTV and Time Warner Cable.
• Netflix’s management has stated that for most of its subscribers, streaming minutes are now
exceeding DVD minutes when it comes to viewing the content.
Aspiration of Netflix
• No challenge to create early release windows [*1]
- New release window is not available for Netflix since studios wish to preserve current sell-thru/ rental
- Avoid pay-per-view, ad-supported, sports, news, adult, UGC
• Intend to introduce lower price from $7.99/mth to $4.99 [*2]
- Netflix will continue to increase the amount of content they offer AND reduce the price.
- Cost of content is fixed, so the more subscribers they have, the lower they can price the service.
They would like to be at $4.99/month (currently $7.99/mth)
• Aim to take current business model global [*3]
- Already launched in Canada in fall 2010
- Will launch in Latin region in Fall 2011 (starting with Mexico and Brazil)
- Will launch in Europe in 2012
*1: Source from Netflix Strategy Deck, May 2010. *2: At 1/8/11 dinner, Netflix VP of Business Development told D. Benefield (SNEI) and N. Colsey (HEoA) *3; At 1/8/11 meeting, Netflix CEO told Bob Ishida and Tim Schaaff
Business Strategy Department
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| 2010 MRP
February 17th, 2011
4
2
Relationship btw Sony Network Service & Netflix
A La Carte / Buy or Rental
Subscription / Unlimited Rental
Film and Television
Home Video (EST/VOD) Window
4 months after theatrical release
Pay TV Window (Starz, Epix, Relativity)
10-12 months after theatrical release
New Release and Catalog
Film and Television
Deep Catalog Film (for streaming)
Catalog Television (for streaming)
Service Model
Release Window
(details will be followed
in the next slide)
Richness in Content
Lineup / Category
1
Revenue
$84 MM
Operating Income
-$26 MM 1
Approx. $2 BN 2 (DVD and streaming)
Approx. $260 MM 2
Relationship
• Netflix’s subscription model viewed as complementary to Sony Network’s transactional
business model
• Netflix application installed on cross-media bar on Sony Network devices (including PS3,
Bravia TV)
Strategic Pros
• Sony devices associated with Netflix’s brand leadership in subscription-based online
streaming market, driving device sales
• More attractive overall value for consumers, offering various business models and broad
offering of content
Strategic Cons
• Cannibalization of catalog sales
• Over-crowding of video services on Sony devices, causing customer confusion
• Shifting consumer time away from Sony’s own services, including games
Notes:
Business Strategy Department
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Group
Strategy
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| 2010 MRP
1. Based on MRP, digital only, 2. Based on company filings.
February 17th, 2011
5
2
Comparison of Release Windows
•
•
Netflix does not provide streaming content in “Broadcast/Cable” window; from 2-2.5 years to 8-8.5 years
Qriocity service can offer EST starting with the new release window and continuing indefinitely with the exception of films from
HBO studios (Time Warner, Fox and Universal) blocked out in Pay 1 and Pay 2. All VOD is blocked out during Pay 1 and Pay 2
Windows for TV series differ from windows for feature films
•
0 Days
+4 Months
+2 Months
Theatrical
+5 Months
Generally
+2-2.5
+8 Months(1) Years
+8-8.5
Years
Hotel &
Airline
DVD and Blu-Ray Disc Sell-through
EST (Starz Studios)
Physical Rental/
Sell-through/EST
EST
EST
(HBO Studios)
(HBO Studios)
A subset of
titles avail. day
& date
PPV/VOD
Day & Date
PPV/VOD
Early
Window
(HBO Studios)
Subscription Disc Rental (Netflix) / Kiosk Rental (Redbox)
Library
Standard
PPV/VOD
Linear TV
Proposed New
Window by Qriocity
EST
SVOD/FOD
Library
PPV/VOD
Pay 1
(HBO, Starz,
SHOW, EPIX)
Pay 1 SVOD*
(Starz/EPIX
w/NFLX, HBO GO)
PPV/VOD
Broadcast/Cable
Pay 2
(F/X, TNT, USA, AMC)
(HBO, Starz,
SHOW, EPIX)
SVOD
Pay 2 SVOD*
(F/X, TNT, USA, AMC)
(Starz/EPIX
w/NFLX, HBO GO)
Broadcast/Cable
(F/X, TNT, USA, AMC)
Library
SVOD (NFLX)/
FOD (Hulu)
* In order for Netflix to get an earlier window, they must either buy-out the
Pay window or carry another pay service (Starz, HBO, EPIX or Showtime)
Qriocity
Netflix
Starz
-Netflix
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(1) Pay 1 commences the earlier of 10 months from general theatrical, 4.5 months from initial home entertainment street, and 3.5 from PPV/VOD. It is feasible for
Pay 1 to commence as early as 6.5 months post theatrical (assuming day-and-date VOD at 3 months post theatrical), but this is still an infrequent scenario.
| 2010 MRP
February 17th, 2011
6
Comparison of Digital Video Services
(streaming)
Subscription
film and TV
Purchase of
recent and
library film
and TV
Next day TV
(adsupported
and, likely
subs)
N/A
N/A
N/A
N/A
Purchase of
recent and
library film
and TV
Yes,
Worldwide
No Fox/Dis in
EU
No Disney
Yes, US only
Yes, but no
new releases
Yes,
Worldwide
Yes,
Worldwide
(no CBS)
Yes,
Worldwide
Yes,
Worldwide
# of Films
6,134
2,500
Approx1
10,000
2,300+
Approx
5,000
Approx
10,000
957
4,458
8,352
# of HD
Films
3,071
1,100+
+100
0
Approx 1000
Approx 800+
0
350+
2,000+
# of TV
Series
700
(19,000+
episodes)
900
(23,000+
episodes)
4,700+
(80,000+
episodes)
170
(4,000+
episodes)
600
(12,000+
episodes)
3,000 +
(50,000+
episodes)
927
(23,700+
episodes)
151 Titles
(13,000 +
episodes)
N/A
Yes
Yes
Yes
Limited
N/A
Yes
Yes
Yes
N/A
Countries/
Regions
US, CA, UK,
FR, DE, AU,
IT, SP, JP
US
CA, UK, FR,
DE, AU, IT,
IR, 6 EU, 2
APAC
US
US
AU
US
US, CA
UK, DE, AU,
JP, 5 EU, 2
APAC
US
N/A
US
Supported
Devices
PS3, PSP,
PC, TV, BD,
Sony
Ericsson
Mobile
Xbox, Zune
PC, TV
(SONY,
Samsung,
Vizio,
Panasonic)
PC, TV
(Vizio,
Samsung),
STB (Tivo)
PC, Xbox,
TV, BD,
Roku
PC, Apple
TV, iPod,
iPhone,
iTouch, iPad
PC, TV, BD,
Xbox, PS3
PC,
TV, BD, Tivo
Archos
TV, BD,
VUDU
devices, PS3
Primary
Business
Model:
Major
Studio
Support
Next Day
TV
N/A
1) Excludes video clips
Business Strategy Department
Group
Strategy
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Group
Strategy
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| 2010 MRP
page 7 February 17th, 2011
7
3
New Revenue Stream from HE/SCE products
~FY10
•15$ / user for every new user registration to Netflix via BIVL.
- Generated 4 M$ contribution for 3 years
- Limited contribution due to low connected ratio and new registration.
•1$ / “Netflix Button” on remote controller of BDP/ BRAVIA
- Applied for FY11 Model in USA & Canada excluding Beyond TV
- Potentially 24 M$ can be generated for 3 years from FY11
FY11~
•"Referral Fees“ from Internet TV.
- 10% of the Gross Monthly Subscription Revenue received by
Netflix from each Licensee-Generated-New-Netflix Subscription
- Contribution is small due to limited new user registration ratio
• SCEA receives 10 M USD flat fee for putting icon on PSN through PS3
~FY10
FY11~
Old BRAVIA bountee fee scheme:
$15/new sub
Existing sub
New sub
7%
New
Existing
25%
Netflix activated
[M$] HE Revenue Share Amount:
8
6
4
Sold, not activated
Activated
Revenue Share: 1$ / Unit
79%
2
0
No Netflix
Sell-Thru Units
FY10
FY11
Assumptions: Execution of “button” contract for FY11 does not include SPE & SCEA.
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
February 17th, 2011
8
Fact-findings Summary & Key Implications
Fact Finding:
• Netflix has acquired 20 million DVD rental and streaming subscribers through 2010, invested over $400MM in
streaming rights in 2010, and committed to spend over $1BN on additional streaming rights in the future in order to
become a major platform in the U.S.
• Qriocity online video service puts strategic focus on transactional models (EST, VOD) in new release windows,
while Netflix offers subscription via an online service (different windows, different business models)
• However, Netflix’s DVD-by-mail service offers films available in the new release window (Qriocity and Netflix
compete in the same window, but with different models)
• Bounty fees from HE Devices contributes positively but its volume is limited, so is referral fees via Internet TV.
•
SCEA receives approx. $10 Mil flat fee from Netflix in exchange for putting Netflix icon on PSN embedded in PS3.
Key Implications:
• Unlimited expansion of Netflix to take price control power is unfavorable
• Qriocity video service alone is unlikely to compete head-to-head against Netflix in terms of scale given Netflix’s first
mover advantage, brand recognition and required investment
• Need to further clarify unique value proposition of Qriocity video service
H/W Device
•
Pros
•
Drive H/W sales through
improved brand and ease of
use with Netflix
More bounty fees (limited)
Network Service
•
Enrich 3rd party offerings on
Qriocity platform
Content
•
•
•
•
Cons
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
Cannibalize in catalog sales
Shift customers to 3rd party
services within Qriocity
•
Potential to earn sizable
licensing fees from Starz if Starz
extends Netflix relationship with
acceptable terms
New buyer paying attractive
prices for streaming rights on
off-network TV product
Netflix may acquire dominant
platform position in industry
February 17th, 2011
9
Strategic Options by primary stake holder
1 Compete against Netflix with subscription service in the U.S.
SPE
a Limit Starz ability to offer SPE content to Netflix by maintaining ceiling on number
of online streaming customers
Cons
- No additional fees
from Starz to SPE
SNE
b Acquire contents
c Bid against Netflix with Starz for PayTV subscription rights
d Bundle Qriocity video service with other competing services under “Q+” scheme
- Netflix paid Epix 180MM
per year for rights similar
to what SNEI would be
bidding on.
HE
SCE
e Cancel Netflix button on Sony devices and delete its icon on PSN
- H/W sales decrease
- No bounty fee(34M$)
xx
2 Co-exist and Differentiate in the US
SPE
f If Starz is interested & needs cap lifted, allow Starz to offer SPE contents to Netflix
g Create original contents for Qriocity and PSN
- Netflix keeps its
expansion
SNE
h Unbundle cable channels and allow customer to select their favorites (Cable Lite)
i Bundle Qriocity video service with Netflix as “Qriocity +” scheme
j Improve ease of use by single sign-on and common UI among multiple devices
- Netflix keeps its
expansion
HE
SCE
k Install Netflix button on Sony devices and embed its icon on PSN via PS3
- Accelerate growth of
Netflix via Sony’s H/W
3 Non US Battle
SNE
l Offer subscription service similar to Netflix in other regions to establish local pillars - JV may require
video service to be
m Expand current niche strategy
opened to any devices
n Develop JV with Netflix to obtain leading position outside Americas
Business Strategy Department
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Strategy
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| 2010 MRP
page 10
February 17th, 2011
10
Strategic Options by primary stake holder
1 Compete against Netflix with subscription service in the U.S.
SPE
SNE
HE
SCE
Revenue
Cost
a Limit Starz ability to offer SPE content to Netflix by maintaining ceiling on number
No
incremental
revenue
No
additional
cost
b Acquire contents
c Bid against Netflix with Starz for PayTV subscription rights
d Bundle Qriocity video service with other competing services under “Q+” scheme
Depends
on open vs
closed)
180 Mil $
of online streaming customers
To be studied by Amit
No
incremental
revenue
Loss of
34 Mil $
SPE
f If Starz is interested & needs cap lifted, allow Starz to offer SPE contents to Netflix
g Create original contents for Qriocity and PSN
To be
studied by
Jim
No
additional
cost
SNE
h Unbundle cable channels and allow customer to select their favorites (Cable Lite)
i Bundle Qriocity video service with Netflix as “Qriocity +” scheme
j Improve ease of use by single sign-on and common UI among multiple devices
To be
studied by
Amit
To be
studied by
Amit
HE
SCE
k Install Netflix button on Sony devices and embed its icon on PSN via PS3
34 Mil $
No
additional
cost
e Cancel Netflix button on Sony devices and delete its icon on PSN
2 Co-exist and Differentiate in the US
3 Non US Battle
SNE
l Offer subscription service similar to Netflix in other regions to establish local pillars
m Expand current niche strategy
n Develop JV with Netflix to obtain leading position outside Americas
Business Strategy Department
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Strategy
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Group
Strategy
Division
| 2010 MRP
To be studied by Mike
To be studied by Amit
TBD
page 11
February 17th, 2011
11
Non US
Strategic Options to cope with Netflix
l Offer subscription service
a Limit Starz ability to offer SPE
content to Netflix by
Maintaining ceiling on number
of online streaming customers
b Acquire contents
c Bid against Netflix with Starz
US
m Expand current niche strategy
similar to Netflix in other
regions to establish local pillars
for PayTV subscription rights
d Bundle Qriocity video service
with other competing services
under “Q+” scheme
e Cancel Netflix button on Sony
n Develop JV with Netflix to
obtain leading position
outside Americas.
f If Starz is interested and needs i Bundle Qriocity video service
cap lifted, allow Starz to offer
SPE contents to Netflix
g Create original contents
for Qriocity and PSN
h Unbundle cable channels
with Netflix as “Qriocity +”
scheme
k Install Netflix button on Sony
devices and embed its icon
on PSN via PS3
and allow customer to select
their favorites (Cable Lite)
j Improve ease of use by
single sign-on and common
UI among multiple devices
device and delete its icon on
PSN
Compete Head to head
against Netflix
Business Strategy Department
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Strategy
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Group
Strategy
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| 2010 MRP
Differentiate & Co-exist
Co-exist without
Qriocity Video Service
February 17th, 2011
12
Today’s Agenda
1) Share feedback from Hirai EVP
2) Breakdown tasks for next steps
– Quantification of each option
– Comparative analysis on release window in US video services
3) Report to top executives: (To be confirmed in next week)
Option 1:
Option 2:
Option 3:
Option 4:
Japan Time
/ US Pacific Time (*Day light Saving)
Mar.18(Fri) 8:00am - 9:30am / Mar.17(Thu) 4:00pm - 5:30pm
Mar.17(Thu) 4:30pm - 6:00pm / Mar.18(Fri) 0:30am - 2:00am
Mar.22(Tue) 9:00am -10:00am / Mar.21(Mon) 5:00pm - 6:00pm
Mar.24(Thu) 11:00am - 0:30pm / Mar.23(Wed) 7:00pm - 8:30pm
[Requested Executive Participants]
K. Hirai, M. Lynton, B. Ishida, T. Schaaff, R. Wiesenthal
[Team Staff Attendees]
SPE: J. Underwood
SNE: M. Aragon, D. Benefield, C. Sheu
HoE: N. Colsey, HE: Z. Namikoshi
HQ: Y. Yasebe, H. Nagata, H. Takahara
Business Strategy Department
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Group
Strategy
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| 2010 MRP
February 17th, 2011
13
Feedback from Hirai EVP
*Shared in the meeting#5
•
Share feedback from Hirai EVP
– 20 million customers of Netflix is quite large, but need to be careful
how to read this number because most of the customers may be
registering to use mail box service primarily.
(2/3 of Netflix customers registered in online subscription service)
(30 % of newly registers customer subscribe online service only)
– Netflix streaming contents are quite old and lack of attractiveness.
Qriocity video service can differentiate by window.
– Head to head competition is a matter of corporate management policy,
so needs to be discussed with CEO and other executives.
– At this moment it seems realistic to go over “Differentiate and Coexist”
options. Need to make sure Qriocity’s competitive advantage
particularly in terms of release window, compared to other video
services like Amazon, Vudu, Cinema now in US.
(Competing in the same window)
– Need quantification when we discuss options with other managements.
Business Strategy Department
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Group
Strategy
Division
| 2010 MRP
February 17th, 2011
14