About two years ago, Corey Jeffrey, a good buddy of Nielsen, and I were talking about what would really make online video take off. I’m not a particularly technical guy (I think HDMI was an 80’s New Wave band), so what I thought the turning point would be is something that would just plug into the USB port on my laptop and magically send video to the box that I plugged into the back of my TV. Although we haven’t gotten there quite yet, I feel like I’ve seen the future. Against all of my wife’s wishes, I got my NetFlix box on Saturday.

I’m not going to provide all of the ins and outs, but suffice to say you can access all of the streaming content from the NetFlix site on your TV. Movies play quickly, it is super easy to hook up, and the quality is good. On the downside, the variety leaves a bit to be desired and the navigating is pretty rough (a giant list from your queue – no folder structure).

I’ve talked pretty extensively about what we believe the untapped future of video is – and I believe the two core areas for development are more streaming full length TV programs, and high quality delivery. From a business delivery standpoint this new box hits on both levels. However, for it to be truly successful, the catalog needs to be expanded.

So the big question becomes monetization. Since the box was $100 and there are no additional costs on my NetFlix account – they’re clearly not making a ton of money with this solution. How, then do they make money out of this magic box?

Ad Revenue: There is probably some play here. Either some type of pre-roll, or plausibly some in programming companion ads, although I think it might devalue the current experience. Given the current weakness in catalog depth, they probably want to make the experience as good as they possibly can. They could, however, provide some type of value added advertising. Consumers should be able to access movie previews and perhaps NetFlix could receive a pay-per-play type model.

Higher Subscription Rate: Possibly, but as my wife said – “couldn’t we just watch this on the laptop?”

Trojan Horse/Killing Blow: This seems most likely. NetFlix themselves have said that the DVD delivery business only has 5 years left. This technology could just be the killing blow for both Blockbuster and my local video store – and pretty much allows them to compete with DVR and on-demand services. At the same time there is no reason why Roku, the manufacturer of the box, couldn’t provide other web based content through the same interface. Do I hear Hulu and YouTube knocking? Well, maybe not Hulu’s or Veoh’s entire catalog, but there is good reason to believe that they could provide content that is not being broadcast on TV anymore.

Okay, time to open up a can of ginger ale, enjoy my air conditioning, and watch “Fast Cheap and Out of Control.”