Although Netflix will try to make a streaming-only service work abroad, the company really doesn't think there's a demand for this type of offering within the U.S. In fact, when responding to a reporter's question regarding Netflix's plans for an a la carte option (there isn't one), Hastings said that while they're "open-minded to" an a la carte service that came without the DVD option, the company hasn't seen much interest in something of that nature in the States. "Everybody also wants to get DVDs," said Hastings. "All the new releases are on DVD, the vast catalog is on DVD. When there is demand, it will make sense for us to meet that demand for streaming only."

...But There is Demand for Streaming-Only

While that may be true - people do want the new releases - the demand for the physical media is arguably an artificial one created by the entertainment industry. Studios simply refuse to offer their movies and TV shows via Netflix's on-demand streaming library until they've been able to pull in a nice profit from disk sales first. This, in turn, forces consumers to not only purchase but also desire the DVD-by-mail part of the Netflix service as opposed to a separate, unbundled option of on-demand content only.

In other words, to say that the demand for streaming-only doesn't exist isn't exactly accurate. After all, Netflix reported that their streaming stats are now at an all-time high with 42% of subscribers having streamed at least 15 minutes of one TV show or movie during the last quarter. This number is up from 22% during the same period last year. Considering that Netflix's subscriber base itself has grown 28% over the past year, this figure means that the raw count of subscribers actively engaged in streaming has now more than doubled over last year. Hastings even said himself that the numbers were "a good marker of increasing streaming adoption."

Although the demand for new releases would probably have many subscribers sticking with the hybrid DVD/streaming service, by forgoing a streaming-only option it seems that the company is overlooking an opportunity to pick up a sizable group of more casual users. There are likely a number of people who would appreciate the option to pay a little less in order to to gain access to the on-demand content only - content which includes a much smaller catalog than what's available by mail. Given the company's integrations into game consoles, set-top boxes and even some TVs, there's actually no need to even own a DVD player anymore to watch Netflix movies. The content is on-demand.

Streaming media is the future, not physical disks. Hollywood knows this too, but as with the music industry, they're fighting tooth-and-nail to keep the old business model afloat for as long as possible. So far, it's working. As long as they control the method of distribution and keep it limited to physical media it will look like DVDs are what the people want. But the people really want streams. From music (Pandora, Spotify) to TV (Hulu, iPlayer) and yes, to movies via Netflix, streaming media is rapidly becoming the method of choice for many of today's consumers. The future is an on-demand world and Hollywood would do better to figure that out now than try to delay the inevitable.

Warner is hoping for a few things from the DVD. First, to generate additional DVD revenue without much more cash put into production (now "Watchmen" can have an additional "ultimate" edition in witch both releases are edited together). Second, to help launch the movie project into a potential new franchise. "As television advertising becomes less effective because of declining TV viewership, movie studios need to reach a mass audience somehow, and having what amounts to ads sitting on store shelves is seen as a crucial antidote," writes the New York Times.

But it doesn't seem like it will work. If DVD sales are down -- off 3.2% last year, according to Adams Media Research -- why would more DVDs be the answer? Will an additional, direct-to-DVD release of a secondary storyline really help sell more DVDs four months later? Doubtful. Remember, Warner Brothers isn't putting the additional storyline on the "Watchmen" DVD as a value-add for fans, but instead asking people to shell out more money for additional content. It's an advertisement on store shelves, yeah, but one that you have to pay for.

The Reznor Blue Print

Speaking to the New York Times about the potential for a "megamovie" that edits together both "Watchmen" and the direct-to-DVD release, director Zack Snyder says, "The überfans of this property are going to go crazy for that." He's right. The überfans -- what Kevin Kelly might call "true fans" -- will buy anything related to the thing they're fans of. That was the concept behind the March release of the Nine Inch Nails album Ghosts I-IV.

NIN frontman Trent Reznor realized that in order to make money, he needed only to appeal to his true fans, his überfans. He gave the first part of his four part album away for free on the Internet, and then offered higher quality downloads, and "deluxe" physical packages for a price ranging from $5 to $300.

The result was that his true fans ate it up. Reznor pulled in $750,000 in three days from sales of music to his core fan base, and may have picked up a few new true fans along the way via the free downloads.

The movie studios could learn from Reznor's blue print. Clearly $750,000 is not enough to recoup the costs of a $100 million movie, but the movie studios don't have to give anything away for free. What they should do is offer users a low cost, legal alternative to BitTorrent where movies can be had cheaply at high quality and DRM free. Then for the überfans -- fans of the director, writer, actors, or movie itself -- sell additional downloadable content, and offer high priced, physical "deluxe" editions with value added features, as well as all the normal movie merchandising and promotional tie-ins.

Alternatively, maybe simultaneously producing a direct-to-DVD release is a good idea. But make it a direct-to-web release, and use it as a promotional vehicle for the movie. Break it up into small chunks (under 10 minutes each), and put it out on BitTorrent and YouTube in episodic format for free leading up to the full DVD/download release of the main feature. That's akin to what Reznor did by releasing the first part of the Ghosts for free, and asking fans to pay for the rest of the album.

Conclusion

Speaking of a direct-to-web release, in addition to the direct-to-DVD side movie, Warner is planning a series of a dozen 22-26 minute animated "webisodes" that will attempt to create buzz for the film and introduce viewers to its complicated plot (more precisely, they will be semi-animated story boards narrated by an actor). That's a step in the right direction, unfortunately 26 minutes might be too long for the web format -- especially for what amounts to a narrated slide show. That demonstrates that maybe Warner just doesn't yet understand the new medium of Internet video.

According to Snyder, the webisodes will eventually be combined as part of a later DVD release -- which is the type of value-add that those überfans will pay for. But if the goal is to build buzz for a potential franchise, then studios should seriously think about the Reznor distribution blue print. It may not be as profitable in the short term, but could work at scale and help to turn some casual fans into true fans for future releases in the franchise.