Gossip Girl: At What Price?
Netflix has a BIG problem. Not because it angered customers by doubling its price or even because it enraged them by attempting to spin off its DVD business.
Netflix’s problem is that it fundamentally has little leverage with the studios. That was manifestly clear when Starz cancelled its movie contract with Netflix last month. And it was manifestly clear when Netflix signed a deal last week to pay $1 billion for the right to stream CW shows like “Gossip Girl” over the next four years.
If Netflix is unwilling to pay the studios’ ever-spiraling prices, the studios can simply go to Apple, Amazon, Google or Hulu (now apparently off the auction block). Netflix’s customers have no more loyalty to the brand than Myspace or Napster had back in the day; the customers will fly in a split second, as the departure of enraged Netflix customers proved over the last week.
Unlike Apple, Google and Amazon, Netflix doesn’t have its own ecosystem. With their own hardware and publishing platforms, these companies have tremendous leverage with the studios — not least because the studios understand that if they don’t sell to those platforms, consumers will pirate their product and play it on their Flames, iPhones and Android phones, anyway.
Even if Netflix successfully jettisons its DVD business and gets itself on every BluRay player, mobile phone and DVR imaginable, the studios will still have the upper hand. If they want to put it out of business, they just stop selling it product.
To ensure Netflix’s survival, CEO and Co-Founder Reed Hastings ultimately has two options: he must make Netflix a content player in its own right — something he’s attempting to do by reportedly paying more than $100 million for Netflix’s first original TV series, The David Finch/Kevin Spacey thriller “House of Cards”.
Or he can merge with a player that guarantees him distribution such as Hulu, Google, Amazon, or Dish, which has its own content-streaming network built from satellite business and the ruins of the Blockbuster video chain.
Or he can continue as he has, hoping that Netflix’s consumer growth stays one step ahead of the studios’ ever-greedier demands. But, as the last few weeks indicate, that thriller may not have a happy ending.
October 18, 2011 at 12:50 pm
Partially correct.
Netflix is dependent on content owners in order to keep its customers happy and content owners have been raising prices egregiously. At the same time, Netflix is becoming a market force that will not let itself be pushed around and content owner’s attempts to compete are laughable (somebody wake me when UltraViolet … or is it UltraViolent? … has failed, at which point all those digital copies become unwatchable, fucking over customers … yet, again another failed attempt by H’wood studios.).
BUT: Netflix is in a much better position than all the other players listed for online streaming (Apple, Amazon, Google or Hulu) and is in pole position to even outpace the studio’s attempts at streaming.
Apple: while incredibly successful with iTunes in the music industry the movie and TV-series attempts of Apple are woefully inadequate and way too expensive. Unless, Apple can somehow leapfrog Netflix and get tens of millions of subscribers for a streaming service, Apple just cannot compete with Netflix for streaming video … and maybe doesn’t even need to. Remember: Netflix was the “killer app” for the Apple TV.
Amazon: while pursuing a very clever strategy on the content acquisition side, Amazon’s strategy to actually get the content in front of consumers should be horrifying to shareholders. I invite you to try to play an online video on Amazon’s website … THAT is how badly the streaming video part is designed. And forget streaming videos to any other (non computer) devices.
Google: while Google has an incredibly powerful tool in YouTube and its automated advertising system for video, few people even know that Youtube has professional content (that wasn’t pirated). Furthermore, Youtube is not designed to be consumed in any other way than sporadic and spontaneous consumtion, eg watching individual videos. Forget about movies in the android market … how many have used that feature? 5 people?
Hulu: listing Hulu as better positioned than Netflix must be some sick joke. The company has barely 1 million subs (vs Netflix’s 25 million) and the content selection is a joke. Until Hulu gets rid of all that stupid clip content (that absolutely nobody cares about) they will continue losing peoples’ interest. The only reason somebody would be interested in buying the company at the moment is the sweetheart deals that Hulu’s owners gave to Hulu.
At the same time Netflix appears to be doing everything they can to contain prices while at the same time getting new/more content, raising revenues and expanding internationally.
Starz: Netflix supposedly offered $250M per year for non-exclusive Starz content, while Starz wanted $300M. When Netflix didn’t cave to the higher demand, Starz walked. I find it curious that nobody (stockholders or analysts) is holding Starz accountable for walking away from that amount of money. As long as Starz gets the same (or only a little less) from cable co’s and can build out its own streaming offering (a la HBO Go), then Starz’ decision was STUPID.
Netflix integration: please name ONE smartphone, game console, internet-enabled DVD/BR-player or TV, non cable-co STB, etc that does not have Netflix integration. For some of those devices, Netflix is really the only reason for consumers to buy the device (eg Roku or Apple TV).
Netflix pricing: even the cheapest cable bill is probably in the neighborhood of $40+internet. Netflix is still A LOT cheaper than that. Don’t believe that? Compare Netflix with buying a DVD … eg Mad Men, Walking Dead, etc. Yes, Netflix lost some customer good-will by raising prices and acting like jerks about it. Yes, the way how they raised prices was STUPID. Why didn’t they simply raise prices for new customers and bring pricing for old customers up over time, all the while blaming content providers for raising prices. That would have resulted in Netflix looking like the good guys vs the bad studios. But at the same time, Netflix probably realized that growth in the US was probably severely limited at that point. How many more customers could Netflix realistically have reached? Based on the latest published sub estimates, subs continue to grow and revenues should explode for Netflix. At the same time, Netflix is doing the smartest thing they could do: expand internationally. Even with the current pricing, especially for streaming only, Netflix should steamroll most foreign competitors, provided Netflix can aggregate sufficient content.
At this point in time, there is no other viable contender for the streaming video crown, despite the studios’ best attempts to make netflix stumble. And to be honest … Netflix might be their only savior. Why should customers fuck around with something stupid like Ultraviolet, when it is easier to download the content illegally. Netflix is the only viable alternative at the moment that combines ease of use with reliability. (I would love to see a study comparing piracy for content available on Netflix with content not available on Netflix.)
Twitter: @filmfinance
October 19, 2011 at 2:15 am
This article sums up the issue I have with Netflix, that they lack leverage and it’s not clear how loyal their subscriber base is.
When Hulu was up for sale if looked like the studios wanted out of the direct to consumer distribution business, and were going to encourage lots of distributors to generate competition and minimize their leverage. But deciding not selling Hulu changes my view.
I would guess that Hollywood fears that Amazon, Google and Apple will become the only distributors and they have a lot of leverage – better to keep Hulu and their own route to consumers.
In the end Hollywood get a good additional revenue stream from Netflix, there subscriber base can not be ignored, and as an independent player they help protect them against the big three interent players. It is interesting that I don’t include Yahoo or MS on that list.
Of course the other key player in all this is Walmart.
November 5, 2011 at 1:03 am
Another issue is really that video gaming has become one of the all-time greatest forms of entertainment for people of any age. Kids participate in video games, and adults do, too. The XBox 360 is one of the favorite games systems for those who love to have a lot of activities available to them, and who like to play live with people all over the world. Many thanks for sharing your thinking.