Netflix a Fast-Growing Rival to Hollywood and Cable
nytimes.com
nytimes.com
The goal of the media companies (at least should be, it seems like some of them have forgotten), like the goal of any business, is getting their product from its place of production to its place of consumption. Consumption, in the case of television and film, happens behind my eyeballs; in my brain.
For the longest time the only way to do this was to get everybody together at a pre-determined time and play it for all of them at once. Imagine a time before the ubiquity of print, imagine somebody standing in the center of a crowd reading from a bible. That is the current system of content delivery. Everybody get together in a big crowd (although the crowd can be distributed) and the transmitter is going to shout some bits out into the air.
Netflix (and online delivery in general) means that we don't have to do this anymore; we've invented the printing press. Everybody can have a copy of everything. We can all access it whenever we want.
I understand why the cable companies don't like this, they're the ones that made the megaphones that the people standing in the center of the crowd shouting out words from a book have been using. They don't want printing presses because then it means they can't sell megaphones anymore.
(I hope this analogy makes sense...)
The content producers should be ecstatic about this.
Consider Comcast cable: according to http://tvbythenumbers.zap2it.com/2009/04/16/average-monthly-... average cable bill in 2009 was $71.
Netflix streaming only plan is $8.
Comcast gets 9 times more per user than Netflix so they can pay content producers more.
Consider also quite possible future where most people ditch $71 cable for $8 Netflix, because it's such a better deal.
Comcast can no longer recoup their fixed costs (which they didn't have to care about before when they were making money hand over first with their monopolistic $71 monthly bills) and goes under.
This is exactly what happened to Blockbuster when enough people ditched it for Netflix. Blockbuster no longer could recoup their fixed costs with less customers because their fixed costs were much higher than Netflix's.
When Comcast and other cable companies go bankrupt, the only company left willing to pay for content is Netflix, and they pay much, much less.
It might be a great future for Netflix and maybe even for customers but it's nothing that content producers should be thrilled about.
A cheap, all-you-can eat streaming plan doesn't bring enough money to be generous when paying for content.
For comparison, consider that the price of Netflix's video streaming plan is less than all-you-can-eat audio streaming plans (the full/premium plans for rdio.com is $10/month, spotify is 10euro/month).
Compare the cost of making a movie or a TV show with the cost of recording an album and number of movies/tv shows available on Netflix with number of albums available on music streaming sites. On that metric Netflix delivers tremendous value for the consumer, but they can only do that by paying very little to content producers.
We cancelled cable shortly thereafter and haven't really missed it since. Netflix streaming, though - wow. I've caught up on Heroes, watched Avatar straight through (the cartoon one), and watched half a dozen movies in the last couple of weeks that even my video store doesn't bother to carry. There's simply no comparison. And it's worth far more than $8 to me. We regularly spend more money than that on video rentals, so Netflix streaming could easily charge us three or four times that.
I can only imagine it's a loss leader for the next couple of years or something.
Watching Mythbusters Collection 6 on Netflix streaming right now.
Compared to piracy it looks pretty good
The $30 you save is basically what the cable company pays the cable content networks. So they end up the big losers.
The cable company/ISP might squawk and raise high-speed prices due to all the bandwidth.
And the $8 is artificially cheap - see my comment below, and will probably go up as more content is available and providers get wise.
Some speculation on the end result: Maybe there will be a $10 tier with old movies, TV reruns; then a $20 tier with the basic cable fare, but Netflix will only pay content providers based on what gets watched; a premium tier with recent movies and first-run TV; and pay-per-view.
So the future might look like not that different from today - high-speed Internet $50, $20 for over-the-top content services, plus pay-per-view for stuff not in your bundle - you save a little money and get a much better service. The cable company/telco probably comes out OK in the long run if it remains a regulated monopoly/duopoly, a lot of the content providers do deals with Netflix, the ones that have legit hits and can go viral will do very well, the ones that depend on being bundled will have difficulty staying in business.
Aside from Nielsen viewers, they have no really good way of knowing who is watching what channel.
They're not ignorant to this fact either -- that I HAVE to buy ChannelIDoNotWant to get ChannelIReallyDoWant is part of their packaging. They know what sells, and they know how to upsell. They're just taking a little bit off the top.
Netflix is doing it differently -- they can tell you exactly what I watched, and how much of it I watched, and pay royalties accordingly. It isn't necessarily that the distribution model is better (though it is), it's that the reportability is FAR more precise.
In addition, their overhead is considerably less. They aren't getting the content into my home. I pay Verizon something like $100 a month for my internet plan. In the case of Verizon, they're also a cable TV provider. They're still charging to recoup (or using that as justification for) their costs. Netflix doesn't have to pay this, they just have to pay their own upstream bandwidth charges, not for the cost of maintaining a network end-to-end.
Offtopic, Grooveshark is $3 a month, as is Pandora. I don't know how Rdio or Spotify can justify their prices, considering I have (to my mind) every conceivable combination of features I could want in streaming radio by subscribing to both Pandora and Grooveshark, for $4 less a month than either of those services.
The problem playing out now is that the studios don't consider you or me to be their customer. Their customers are Walmart, Blockbuster, and cable companies. (Things get trickier when you have "Cabletown" situations, where content providers merge with content delivery.)
Right now, Netflix exists at the pleasure of the studios. I liken it to early cable: Cheap, ad free, accessible, and not long for this world.
Not that you don't make an otherwise interesting point, but weren't video tapes, and later DVDs, the "printing press" for moving images?
What Netflix adds is instant gratification. It removes the friction of getting what matters: a movie playing for you right now.
This is why cable companies are upset. They've had printing presses of a sort with video on demand, but it was never quite good enough. Not quite the best choices, and not always really "on demand".
Netflix has made this real. (Cable could have also, and still can, but they won't do it as well because they seem to be deeply attracted to stupid constraints and surreal pricing.)
If Netflix can get live sporting events there'd be pretty much zero need for cable except as bandwidth providers.
It's a different fight this time; the internet is much more mainstream than in the 90's, technological progress in the form of portability and speed, and just the different consumption habits for video being more favorable to renting. In your analogy, the people with megaphone are the ones paying for bibles; the producers are have to adapt just the same as those with megaphones.
Make no mistake, the utopian ideal for everyone to have a copy of everything will have a monthly service charge.
Years ago, we had Moviefone which controlled the cinema ticket distribution biz, it aggregated almost all American theaters and had superior technology. Eventually, the cinema owners decided to cut out the middleman and came out with Fandango, their own distribution arm. This pretty much busted Moviefone.
Similarly, I think Netflix faces a tough spot. I think their moat comes from already having a massive customer-base who is willing to pay and has their credit card information installed for recurring payments. Still, online distribution is an area that's much easier to enter and compete on than with mailing DVDs through the postal system.
So I have to wonder if the Studios will decide to try to cut out the middleman and offer their own instant streaming products. Starz is set to re-negotiate their contract soon and I believe they'll get a rate that is more in line with the Epix deal. I can imagine that the studios will press for more money, so Netflix's margins might not actually increase. Instead the money they save on the shift from postal to streaming will go towards content acquisition expenses.
The big benefit I see Netflix offering is the ability to aggregate content that is separated from the studios... it's a third/neutral party. We saw a bad example of what could happen when Fox pulled their content from Hulu for Cablevision customers because of a contract dispute over rate hikes for Fox's television networks.
What I wonder is whether Netflix will ever start distributing original programming. If you look on the premium cable networks (HBO, Showtime, Starz) they all started out as just ways of distributing movies. Eventually though they branched out and started distributing original content -- HBO really pioneered this when Chris Albrecht was leading (he now runs Starz which is bankrolling new shows like Spartacus: Blood and Sand). Offering original content helps add value and increase the moat a bit.
Or, maybe Netflix should use some of their overvalued stock to acquire controlling stakes in studios that have rich content libraries and try to control their own destiny.
"Netflix pays about 15 cents a month for each subscriber, much less than the $4 to $5 a month that cable and satellite owners pay for access to Starz."
Why give Netflix such a sweet deal?
1) Satellite/cable providers receive most of their content via satellite feeds. The programmer covers the cost of the satellite uplink / leasing space on multiple satellites. This is very expensive. Netflix handles the distribution costs over IP.
2) Programmers have cable/satellite providers backed into a corner. They have total control of the content that people want. The providers are at a huge competitive disadvantage if they can't make a deal so the programmers end up getting very favorable terms.
3) Consumers keep paying higher prices for cable/satellite. This whole concept of 'cutting the cord' has only arisen in the last year or two and it's still a small movement. If people are willing to pay the programmers will naturally test the limits. Contrary to popular belief this has not benefited the carriers. Some cable companies actually lose money on their video offerings these days. (that's why they're pushing triple-play so hard)
4) The programmers are hedging their bets. Prices will go up for Netflix in the long run. For now the programmers are smart enough to see the trend moving away from linear video via cable/satellite to IP and they don't want to miss the train. My guess is they want to "educate" customers on how to pay for video online by making deals at sweetheart prices. This won't last. Especially when the competition presented by piracy is massively reduced via ACTA. We already have the domain name seizure legislation. In a few years they'll be free to jack prices up.
But the deal language was general enough that they were able to fit Netflix in as a distribution partner - http://bit.ly/Tnbpb .
When the Starz deals are up, for instance the Disney deal is up in 2012, it seems likely that the studios will up the ante.
For instance, Netflix's deal with a group of studios including MGM was reportedly worth $1b over 5 years - if you divided that by 16 million subscribers it would be something like $12.50 a year per subscriber (ballpark, you would have to know the details, make assumptions on growth, discount rates etc.)
For now, it's a great deal for consumers, bring your high-speed Internet plus $8 and get unlimited streaming movies. But it seems likely that the $8 might go up to get better content, or get tiered for earlier access to more and better films. And ISPs might cry that it crushes their bandwidth and raise prices (especially the cable ISPs whose $100/month cable TV bills are getting canceled in favor of Internet and over-the-top video).
I suspect cable companies will not suffer too much, unless cutthroat competition unexpectedly breaks out for high-speed Internet subscribers. The big losers will be cable networks that depend on being bundled in basic cable. Why should I pay $30/month for 150 channels I don't watch? (see for instance http://bit.ly/9LTiYk )
The Golf Network and Food Channel can stick it as far as my own bill is concerned, and unless networks can find people to pay a la carte they will have a hard time staying in business.
It seems this is an area where algorithm-fu really shines.
Also Starz is, well, nice and all, but at any given time there's only a few really A-list movies on there under a year old, and a motley collection of relatively recent B-list movies. It's not necessarily quite as big a name as they might like to present themselves.
They have very little to zero leverage for content deals.
They've already chased the market to the bottom on pricing.
But most of all, they're just another over the top broadband service. NN is going nowhere. One day real soon now, Ma Bell is coming a knocking for $4 of that $8. They don't "own" the customer in the telecom sense, and that's all that really matters today, tomorrow, and forever in the US.