Can Netflix capture the set-top box?

Netflix's ongoing progression toward digital delivery continues, this time with a set-top box deal with LG. The big question is whether Netflix can capture the set-top box--the Holy Grail and de facto home entertainment server these days.

According to a bevy of reports (see Techmeme), Netflix will begin delivering video rentals directly through a set-top box made by LG Electronics. The effort builds on a download delivery service launched a year ago. The problem with Netflix's current download service is that the movies are confined to your PC.

So what's Netflix trying to do? For starters, Netflix is trying to build a moat around its business model. Movie rentals are likely to be a hot theme at CES next week. Meanwhile, Apple is expected to bring movie rentals to iTunes. Using Apple TV these rentals could be beamed to your TV. In addition, there are devices from Vidu that look to do the same thing. Toss in Amazon.com's Unbox and the usual cable players and delivering rentals over a set-top box isn't an original idea.

Meanwhile, Netflix (all content) has to move beyond its reliance on the Postal Service to deliver movies. At some point, instant gratification will matter and Netflix has to be ready for digital delivery. There may be cost issues with mail delivery too.

Netflix's plan appears to be to integrate into the set-top box. But questions abound. Here are few lingering items:

• Can Netflix land more digital set-top box partnerships? LG is a massive company, but the two leading set-top box players are Motorola and Cisco (via Scientific Atlanta). Those two dominant set-top boxes are typically delivered via your cable or satellite provider. Consumers will be able to buy their own set-top box, but how many folks will bother? There's a reason a Netflix-branded box didn't fly.
• You can already rent movies on set-top boxes. Netflix subscribers on a set-top box will get a deal, but really is renting movies on demand such a big deal. I can do that today via Verizon (Comcast or any other provider too). You can squabble over pricing, but the immediate gratification is already in place. Why would I go out buy my own set-top box just to get a movie rental? Disclosure: I'm a lazy (really lazy) TV consumer. Another wrinkle: While Netflix's download service gives me 17 movies on my PC for $17 a month but what I really need is the time to watch them.
• Can Netflix be embedded in other devices? Reports indicate that LG may integrate the Netflix service with its HD DVD/Blu-ray DVD player and even HDTVs. This development is probably a better route than the set-top box. Picture a Netflix inside motif.

Bottom line: Netflix's core DVD rental by mail service will continue to do well and rentals delivered directly to TVs are a nice hedge. While there will be debate about Netflix's future I refuse to count the company out. Netflix has survived competition from multiple fronts (Wal-Mart, Blockbuster, Amazon, Apple etc. etc.) and has more than weathered the storm.