Is Reed Hastings Still a Visionary?
You can call Netflix (NAS: NFLX) CEO Reed Hastings a lot of things. Many of these would be unprintable, given the customer backlash and share price collapse Netflix suffered in the second half of 2011.
But whatever derogatory names you might have in mind for Hastings, you gotta admit that he's a visionary.
Yesterday is history
I mean, this is the guy who saw business opportunity in an exorbitant late-return fee at Blockbuster. Most of us had never seen a DVD disk when he realized the mail-order potential of the new movie format. The service he created turned the mature movie rental business on its head and eventually sent market leader Blockbuster into bankruptcy. And all the while, Hastings saw the end of the DVD era coming, scrambling to make Netflix an early leader in the all-new digital market.
It's an impressive track record for anyone not named Steve Jobs, even if the execution of the digital dream has left some room for improvement.
So when Hastings sat down at this week's UBS media conference and delivered his vision for the next 10 years of digital media, you can bet I listened. And you should, too.
Tomorrow is a mystery
The core of Hastings' media market of the future is IPTV services. When consumers move from pre-programmed show listings delivered on a fixed broadcast link and into a dynamic, network-based media model, all sorts of cool things happen:
For example, when the TV manufacturers figure out how to do 3-D or 1920 or 4K video, they have a real problem, which is none of the cable or satellite broadcasters broadcast 4K video. So they've got this cool new technology, but they can't get any content for it. But to the degree that their systems are Internet connected and Internet delivered content, then they can deliver 3-D, 4D, 4K, all kinds of new video experiences to the TV.
You can verify this claim against the downright glacial rollout of plain old 720p and 1080p high-definition video services. When presented as a cable or satellite channel, an HD feed takes up about as much channel space as four standard channels -- and broadcasting bandwidth is a very limited resource. That's why not every channel is shown in high-def on DIRECTV (NAS: DTV) , Comcast (NAS: CMCSA) , or even Verizon's (NYS: VZ) FiOS today. Every new HD station means losing a handful of lower-quality channels.
The upcoming standards Hastings talks about would do even more damage to such a constrained system. 3-D video is twice as bandwidth-hungry as a 2D stream. 4K, where the screen resolution quadruples both horizontally and vertically, is an absolute hog and equivalent to about 16 HD stations -- or something like 64 standard-def ABC or Discovery Channels.
That's a big chunk o' channel space. Remember that $19 billion radio spectrum auction back in 2008? The radio licenses being sold off came from retiring just 18 UHF television channels. You just won't get a lot of 4K stations through traditional broadcast feeds of any kind.
Take two of these and call me in the morning
And the fix for this bandwidth crunch is, as Hastings correctly points out, IP-based video feeds.
Networking technology is getting better, faster, and cheaper every day. In particular, existing fiber-optic lines installed years ago improve whenever Cisco Systems (NAS: CSCO) , JDS Uniphase (NAS: JDSU) , or any of their many aggressive competitors comes up with more efficient standards.
Today, Netflix streams account for about one-third of all Internet traffic during peak, prime-time hours. But even at the worst of times, all of that Netflix video would be able to pass through a single strand of fiber-optic cable, using modern networking standards. And this stuff is going to be everywhere before you know it, says Hastings:
What we're going to see around the globe is like rural electrification. We're going to see fiber to every home and neighborhood and business and school. And over the next 20 years, you're going to see just fiber everywhere.
That is how the living room TV becomes the next battleground for high-tech companies, as exciting as the smartphone space is today.
Right now, "smart TVs" with networking powers are about one-third of the sets you see in electronics stores. But that's just the beginning. "It's just going to increase year after year as the component costs come down and this whole smart Internet TV click-and-watch paradigm is changing," Hastings says. "I mean, it's just going to be a phenomenal revolution over the next 10, 20 years."
The smart TV market is still in its infancy, but should become the mainstream standard in just a few years. It's like the 1990s, when cable TV replaced forests of rooftop-mounted antennas and CD players pushed vinyl into the hardcore audiophile niche. Or more to the point, like the 1950s, when prewar party lines turned into a committed phone line for every home -- the economics suddenly made sense.
In this light, I think you can forgive Hastings for moving too rapidly toward the all-digital light at the end of the tunnel. Staking out a large territory right now is sure to pay serious dividends in five to 10 years. And you are a long-term investor, right?
I don't know about you, but I agree with every point Hastings made here -- and I'm excited about the investment opportunity of it all.
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At the time this article was published Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Cisco and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, which has highlighted this seismic media shift since time immemorial. You can also follow him on Twitter and Google+. We have a disclosure policy.
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