“TV providers and movie studios… increasingly see Netflix as a competitive threat”
NY Times, 11/24/10

Someone must have said this somewhere and man, the media LOVES it.

Unfortunately, it is, essentially, bullshit.

I read the NYT story, written by two of its best, a few times, trying to figure out where the reporting was that suggests that Netflix is getting away with some heist of the industry or that any studio is actually scared, in any way, of the Netflix model. It’s not there.

And the giant, gaping hole in the story is brushed past repeatedly.

The shift to streaming as the primary Netflix business pushes the Netflix offerings farther away from the theatrical release and has changed the cost to Netflix of streaming – so far, just for 3 studios and Relativity, but in future, everyone they want to be in business with – exponentially. I don’t trust Rich Greenfield’s research very much, but using what he told the NYT, Netflix’s deal with Starz – pre-streaming-awareness – was made for about 10 times less per subscriber per month than the deal Netflix just made with EPIX, taking the 15 cents per subscriber per month Starz has allegedly been getting to around $1.50 per subscriber per month for EPIX. And that’s for product that is clearly not as valuable to building the Netflix subscriber base… and 90 days after release on EPIX at that, making this a fourth window that’s likely to be a full year from release.

And the deal for Relativity Media is good for somewhere between $.50 and $.75 s month per current Netflix subscriber.

Moreover, if $7.99 a month is the new standard for Netflix (which still, btw, includes the cost of shipping as many DVDs as a customer wants each year, one at a time), you are then saying that just Relativity, Paramount, Lionsgate, and whatever MGM product is included, as Spyglass’ plan is to release films through other distributors, eats up at least 25% of the total revenue per customer each and every month. Even the most conservative projection of a new Starz deal would put Netflix in the position of paying more than 50% of their total revenue for rights to stream the most recent film of half the MPAA Majors, 9 months or a year after release.

NYT’s story suggests a dilemma for the studios as regards Netflix. The only dilemma is how long they can take the money without cracking a smirk in meetings.

This lovely image of Netflix as arriving with an open checkbook in Hollywood, the only ones in town spending, is just hokum. DVD sales have been an issue for the studios for years already, long before Reed Hastings changed horses. Pay-TV networks have been getting away from premiering movies as their primary draw to subscribers for even longer. Have you looked at the pay-tv schedules lately? With the exception of the smallest of the nets, it’s less and less selection of films on more and more channels.

And this bizarre notion that Netflix reducing its price for streaming+1 this last week is a danger to the movie industry because “for studios that only a few years ago were selling new DVDs for $30, that represents a huge drop in profits.” Huh? A. The readily available price point on DVD at retail has been half of $30 or less – for the brand new films – for years.

B. This is not as complex as the chicken and the egg. Netflix has had almost no effect whatsoever on the DVD market, much as some studio execs would like to pretend. The studios crushed the DVD bubble themselves. As of this time, streaming on Netflix is NOT a DVD market replacement. The DVD market is sell-thru first, rental second, and like movies, tends to be over in 12 weeks or less. Netflix streaming occurs many months after that… including in the EPIX deal, where there is a 90 day window from a film playing on EPIX before it streams on Netflix.

In the NYT story, they write, “As a general rule, films that can be streamed instantly are not fresh out of theaters or plucked from the current TV season.” Not fresh off of the DVD rack, when it comes to studios. Netflix is clearly a home run for any – including myself – who loves the full width and breadth of cinema and isn’t looking to see anything remotely current. But the pitch is “everything everywhere.” The pitch is “now.”
And that is not Netflix’s model, now or likely ever. Shhh… don’t tell the media.

C. Netflix, unlike the first incarnation, is not now taking advantage of an opportunity that no one else thought of or could put into action. They are paying premium prices to stream titles that they can market… and are still buying DVDs (albeit at a reduced number), many which are embargoed from subscribers for a month from the sale date on the discs. Welcome to the inside game, Reed.

D. Netflix streaming is a new income stream that Netflix has made a serious revenue center for the studios (the ones with which they have made deals n 2010) much faster than any of the studios would have acted on their own. Even the studios not under Netflix now know they can make this transition with the promise of real revenue. It isn’t cannibalistic, except to library value, the bottom on which dropped out two years ago. With few titles excepted, most of the studio product that Netflix streams is in the DVD remainder bins by the time it lands on your streaming cue.

Do you know how many of the last 20 Best Picture winners are streaming on Netflix? 1. Forrest Gump. Obviously, Oscar is not the most important standard in the world. How about the Top 20 All-time Worldwide Grossers? 2. Lord of the Rings: Fellowship of the Ring and Alice in Wonderland. Even though Sony and Disney are involved with the Starz deal, none of the Pirates movies or the Spider-Man movies and others are available for streaming at this time.

When the media starts treating Netflix streaming like it is a complete replacement for other distributors and other distribution methods, they are just plain wrong.

And I don’t think that Reed Hastings and Team Netflix are moving forward without getting this. Quite the opposite. I think they are moving in this direction only because they know that inaction at this time will mean no Netflix at all in 2015. While the media is putting on a parade for them, they are scrambling to try to rebrand their business, which is still in The Blockbuster Zone, so that when the dust settles, they will be so well established that they will either be bought by a studio (or two) or be a strong enough brand to be the central point for some specific kind of product, whether it be being a clearinghouse for indie (which could still include studio libraries) or movies of a certain age or something.

If you want to know why Chris McGurk is talking about taking Blockbuster’s assets, you can bet – and I haven’t talked to him directly about it – that he is looking at his own Netflix-style play. No brick and mortar, but a great mailing list, deep customer info, and a great name that can be leveraged once they get over the hump of it representing the past.

Anyway… I don’t want to be Mr Anti-Netflix. I love Netflix. But I can also do math, even while wearing rose colored glasses.

Netflix is not, in spite of all the enthusiasm, doing the same thing with streaming that it did with mail order. And their behavior shows this as clearly as anything. $7.99 is not some kind of conceptual move. They need more subscribers to survive the giant increases in acquisition costs that come with streaming… a lot more subscribers. And they need to walk the fine line between the perception that they offer everything and the reality that they are never likely to stream more than a fairly narrow group of the most popular films.

Not that there’s anything wrong with that.

After the jump, some more stuff I wrote up about the history of the company.

In 1997, Netflix and Reed Hastings came up with an absolute game changer. Because of DVD being more durable than tape and being flat, there was a business to be done renting movies by mail order, made even cooler by the use of the web as the ordering platform. But the even bigger idea was subscriptions over individual rentals. Even without special deals with the studios, which Netflix wouldn’t start doing for years, the cost argument made sense. Margins were thin, but profit was viable. By the time Blockbuster got into the flat-rate business, their brand was tainted and the company flailing about, experimenting in public, smelling of desperation, was not encouraging. Wal-Mart got out – the margins weren’t worth their time – before they really got started.

Great. The studios were happy to have another customer in Netflix, DVD sell-thru continued to be the cash cow of all cash cows, and Netflix was a blip on the radar.

And then came the DVD sell-thru maturation. Studios ran out of TV library to keep overall DVD sales looking so healthy and the collecting game slowed dramatically. At the same time, even after the Blu/Red wars ended, hi-def DVD sales were slower than hi-def TV sales.

That’s when the panic really began. And with the panic, studios actually started paying attention to Netflix, which by the way, was getting ambitious and cutting its own throat a little with experimentation of how to be a content provider and not just a procurer, thinning their bottom line.

Streaming has been Hollywood science fiction for a long time already. A potential holy grail. But with a very limited to-computer market, even with iTunes having some success, and a never-quite-what-they-hoped PPV market on cable and satellite, if the technology ever caught up, however would it fit into the model.

Thing is, streaming was one of Netflix’s more successful experiment. A significant portion of their library was made up of films whose streaming rights were rather inexpensive to acquire. And on top of that, STARZ put streaming into their deals with Disney, Sony, and other smaller entities when no one was really streaming… and did a deal with Netflix as streaming was building. This eventually let to some discomfort between Disney, in particular, with STARZ, but they worked it out… for now. The STARZ deal with Netflix ends in 2012 and a renewal will, without question, cost significantly more than the EPIX deal… IF Disney even wants to play the streaming game by then.

But I’m getting a little ahead of myself…

Streaming started taking off for Netflix, where they worked out the bugs, making it work technically, and then got ahead of the curve by making an aggressive push to make the technology easily accessible on your TV and not just your computer.

A double edged sword.

By making streaming work, Netflix showed the studios how streaming could work. All of a sudden, studios knew they were/are a non-copyrightable technology fix away from doing whatever they want with the content.

The Netflix stock price has taken off. Media is in love with any new tech that allows us to sit on our ass and get more for less, rarely considering what that proposition means. We’re so excited that we haven’t really noticed that streaming has been and still is, for studio product – and that’s what drives the business, whether we like it or not – months after DVD release and rental availability. It’s the third, and nearly final, window.

So for instance, the newest Disney title on Netflix is Alice in Wonderland. Released on March 5, on DVD June 1, and premiering on Starz & Netflix on Nov 1, five months after the DVD window opened… and that was the short DVD window, as you may recall. Disney’s next release, Prince of Persia: The Sands of Time, went into release on May 28, went to DVD 16 weeks later (Sept 14), and Starz has no premiere date listed, but I would expect it in late February/early March on both the pay cable network and Netflix. You can get the movie from Netflix now and for the last 2 months, but only on DVD, which Netflix would prefer you not to prefer.

I can’t really explain why the media so overstates the realities of Netflix and the potential of its future. Assuming it survives, it will not be ubiquitous. Even the NYT article, though it seems to want to say otherwise, allows that the studios will do their own thing in time. And they will. Netflix did pave the way… they made it clear that it could work. But the technological bar to make this work for the studios is low enough that the only issue for them cutting out the middle man will be marketing. And Netflix will have some value in that regard.

But if I were a betting man, I’d bet on the $7.99 price point becoming the jumping off point for a cable-like a la carte program, as soon as they try to close Starz, in which you pay a few dollars more for Disney, a few dollars more for Sony, etc, get better access and end up with a bill back up in the high teens. Or not. It’s really not up to Netflix. It’s really up to the studios. Disney is the one with the most obvious ability to convert their fans into buyers of streaming at $7.99 a month or more for their product alone. And that economic reality will make doing deals with any middle man, which Netflix now is, less and less attractive for the studios.

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