The question has been posed – will digital replace Blu-ray? Yankee Group’s take in Will Blu-ray’s Victory be Short Lived? concluded the impact will be minimal on sell-through but massive on the rental market – if only a company could solve the puzzle of hardware and service integration.

With today’s launch of the Roku-Netflix set-top box we are left to wonder if  the days of aimlessly perusing the aisles of Blockbuster – hoping to spy a film that piques a modicum of interest and is in stock are behind us? Further questions also abound – such as  how will we burn the calories we walked off en route to the mailbox to pick up our DVDs if we no longer need to leave our couch? 

On a more serious note, the offering begs the question – can Netflix succeed where so so so many others have failed (see Akimbo, MovieBeam with a slate of others on the verge of qualifying for failure status)? As I have stated in the past, if anyone can make hay in this market it will be Netflix and their first offering seems to heed the market conditions wisely:

1. Free Content! Time and again hardware manufacturers have failed by because they wanted to charge for hardware and content - a failed value proposition for nearly all consumers. 
2. Hardware Price. Alternatives cost well above the $99 price point. By foregoing a hard drive and other unnecessary features the box becomes an impulse purchase decision.
3. The Power of Netflix. Netflix has a core of zealots who the company can market the box to – allowing them a built in user base that other hardware has not yet offered.

Gushing aside, there remains a few chinks in the Netflix chain or armor which the company will need to hammer out:

1. More Blockbuster Content (no pun intended). Netflix will need to expand its offerings of video content beyond much of the older archived content generally available on the service. This will make users that find securing new release DVDs challenging prime subjects for the hardware and greatley expand the total addressable market.
2. HD. The next question that will be posed is “what about hd?” I would even content that the blogosphere is already abuzz with such pressing matters. Netflix will need to determine an HD strategy in short order to make users with those supersized HD sets happy.

Overall, this seems an important first step to introduce a complementary digital download service to a wider audience. It offers Netflix an opportunity to offset some of its shipping costs and provides an advantage over rival Blockbuster. For Roku it allows them to promote their brand name and potentially open the market up for its other products. For the competitors it provides insight into how the hardware can compete – some will add a hard drive, some will offer DMA functionality, others will compete on form factor. It is important that there will be room for differentiation and competition – that is, until the service launches on the XBox 360 or the PS3 (which may not happen but would make all the sense in the world).