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David Poland

By David Poland poland@moviecitynews.com

For The Love Of Netflix

It seems so obvious… but it won’t sink in for what seems like a majority of media and probably a majority of interested consumers.

Let me try to explain – yet again – using Netflix itself as an example.

The perception that Netflix was the primary component that pushed Blockbuster and Hollywood Video out of business is false. The key component that led to the demise of brick & mortar filmed entertainment rental was the industry’s decision to both launch DVD and also to make DVD a sell-thru product. That is what allowed Netflix to exist.

And even as Netflix came up with this ingenious idea – truly brilliant – to put DVD rental into a subscription model without the costs or limitations of brick & mortar, they still made deals (not unlike Blockbuster) with all the major studios for better wholesale pricing, actually giving stock in Netflix to all 7 majors. Three elements of the new DVD reality made Netflix possible. 1. Greater durability. 2. Mail-ability at a reasonable price. 3. Much lower pricing on DVD sell-thru than on most of what had been the VHS market, which emphasized rental by design.

In this partnership with the industry, Netflix not only could exploit their brilliant idea of subscription rentals with (in principle) unlimited discs rented each month, but they – pretty much – had every DVD title in the market. There were some they did not have. And there were specific complaints from people with extremely specific interest in film. But those complaints were a small percentage of their business.

There was no motivation for content owners to try to compete directly with Netflix because one of the primary attractions of Netflix was that you could one-stop-shop DVD. Very few people would want to go through a parade of sites to find each film they want to rent… and if the Netflix concept was split between even 2 or 3 consortia of studios and indies, how could they match the Netflix pricing? Couldn’t. So the bar to entry was very, very high after Netflix delivered effectively on their game-changing idea of subscriptions.

Are we all still on the same page?

I find that this is where most people I talk to – media or consumer – still have Netflix in their heart. And though the model has changed by 90% or so, each change is met with cautious excuses and sympathy rather than serious objective analysis.

I continue to try to find the right metaphor to explain this shift. Because it does not end in death (like a person getting sick and his family not accepting it) and it does not end in a simple adjustment (such as a professional athlete changing their game to emphasize smarts instead of young muscles) and it cannot end in everything staying the same, in terms of perceived (or real) dominance.

Maybe real estate offers a viable metaphor. Say you buy a house at the top of the market value. You love the house. But then, just a couple years later, the market shifts and you suddenly realize that at the price you paid, you will never ever get your money out of that house. But you love the house. And it still has value… just not quite what you paid for it. Assuming you want to live there for 20 years or more and that you aren’t just in the investment game, how bad is this? Clearly, you would like it to be otherwise… but you still get to live in a house that you love for a long time and that still has a great deal of value, just not what you paid for it.

Just as the seismic industry shift that made Netflix possible, we are at the start of the next seismic industry shift… very, very early. And as smart as they are, Netflix jumped on this one from the start as well, ahead of anyone else. They made generous deals with cable networks that had streaming rights to the movies that studios licensed to them… deals that were then considered generous when studios thought there was virtually no money in streaming. So studios and cable networks were happy to have the extra income.

But Netflix’s success in streaming combined with increased internet speeds available to an increasing percentage of American households turned the added-value of streaming into what more and more looks like a major spoke of the business. But the goldmine for studios hadn’t quite opened up. There was the threat of Hollywood union strikes. WGA actually went out in November 2007 and a deal was done in February. SAG’s contract ended in June 2008. AFTRA made a separate deal with AMPTP in July and sped up its theft of what had traditionally been SAG contracts. And SAG leadership was finally beaten into submission by AFTRA, the economy, and the lack of any real support from the other unions in April 2009. The result was a streaming deal that gave producers the first 17 days (or 24 days for 1st yr shows) without residuals and further streaming at 3.5% of actor minimums or under $1k for a year of streaming.

About a year after SAG’s threatened strike, Netflix rolled out their first $100m-a-year deal with Ryan Kavanaugh & Relativity. And the price per year for high-end content has only gone up since. The Disney deal, which commences in 2016, is for a minimum of $350m a year for the studio’s content (not just movies, but across multiple Disney-owned platforms).

The STARZ deal, which brought Disney and Sony content to Netflix streaming, was still in effect when the Disney deal was signed… and paid about $3m for each studio each year.

I’d say that a cost increase of 115x – not 115%… 1115 times – is a paradigm shift… not one in which Netflix has control.

As the Disney deal indicates, the spin that studios would stop licensing content to Netflix because of Netflix’s growing success is completely false. Disney was one of the most Netflix-resistant studios as the STARZ deal ended. But the massive price that Netflix was willing to pay changed their tune. The same would be true of any studio. If the price is right, the deal gets done. What had ended – and why the pricing skyrocketed overnight is a great mystery that we will only learn on someone’s deathbed – was being able to buy top content at so little cost. In fact, Netflix paid more for a single episode of “House of Cards” than they had been paying for a year’s content from major studios prior to the paradigm shift.

Okay… checking in again… are we all still on the same page? Am I saying anything that offends or upsets or can really be argued against?

Netflix is not in a bubble. Other things were happening as this all happened as well. The DVD market collapsed. HBO, having gotten the best out of their back catalog when the DVD business was strong, launched HBOGo. Apple and Amazon both expressed their aggressive interest in playing on the same field as Netflix (as Hulu already had). Cable companies started feeling seriously threatened, becoming one of the media’s favorite chew toys. Re-transmission fees charged by broadcasters become the norm (and is still being fought market by market). Thieves like Aereo are coming out to steal their way to a fortune. Content owners like Major League Baseball are creating their own all-platform deals direct to consumers. Internet quality continues to improve, as did hardware to stream programming. And more.

Sidebar – Let’s revisit cable. When it was installed across America, every territory was negotiated heavily with local municipalities, Carrying local stations was part of the deal… community service, as it was. Now they are being asked to pay for what they were forced to carry just 30-35 years ago. That’s a huge change.

So here is my Netflix disconnect. It is not disrespectful to the company. It is simple reality, whether Wall Street wants to bubble the company or not.

Netflix is a company whose content is contracting at a time when content availability is expanding and will continue to expand exponentially. This doesn’t make Netflix “bad” or “worthless” or less of a trailblazer. But it “controls” the streaming category in an increasingly limited way with each passing day now.

When the Disney deal kicks in, Netflix will have an exclusive content deal with one of six majors. The question is not, “Why will Netflix fade?” The question is, “What does nature do when there is a vacuum?” And there is a five-major studio vacuum going on right now.

And the analogy is, ironically, the DVD business. Every major has a Home Entertainment division. But some studios used other studios’ infrastructures to actually do the heavy lifting of production and distribution on their DVDs, even with the “producing” studio’s name out front. So it’s not like every major needs to have their own streaming business or that they are afraid of teaming with others for infrastructure.

BUT… they were never in the “Blockbuster presents” business. Streaming is more permanent than any Home Entertainment delivery system in history. Until we rise about the internet technically, we will be streaming. And streaming’s dominance will increase annually for decades. (This is not to say that cable/satellite are over… different conversation.) Right now, the majors are, for the most part, feeling their way around in the dark on this. And to their benefit, Netflix is helping fund their baby steps.

But just do the math. As the streaming universe expands – and I will spare you my theories about that future, which I have written about repeatedly – the content needs to go somewhere. Moreover, the number of studios getting paid big bucks for the content needs to expand.

Unless you imagine a $75 a month Netflix that streams a significant percentage of all filmed content, you can’t make the math work for everyone. You just can’t.

So you can crow about Emmys, but deal with reality. Netflix paid over retail in their campaigning for nominations, as they did for the shows that are nominated. Yes, it matters a lot that the shows are good. But if there was not the giant pending spree, there would be no Emmy nominations. Getting nominations for Winter’s Bone didn’t make Roadside Attractions into Warner Bros. Award nominations are the toys of the industry, not a measure of real industry importance. Netflix is important. but the Emmy’s OMG stuff is lazy thinking.

Why did it take HBO so much longer to get Emmy nominations? Because cable and broadcast were at war. Cable wasn’t eligible. Streaming shows are and have been for a couple of years. Cable started the ACE awards, which they gave out until the Emmys gave in. It’s another false, lazy equivalence.

Frankly, it’s a lot more impressive that the History Channel got 16 nominations for “The Hatfields & McCoys” last year. The freakin’ History Channel. How’d they do it? Money and the content… same as Netflix this year.

WAIT! I think I found a good analogy. McDonald’s. Top franchise. Huge business. Huge cultural presence. Without attaching the quality of the food to them, that is Netflix now… as McDonald’s was in the 1950s and the early 1960s. Then Burger King started to expand. McDonald’s still dominated. but then, other kinds of food started franchising. Chicken, subs, coffee, roast beef, hot dogs, ice cream, etc. McDonald’s hasn’t gone away. It still has a big footprint. But the fast food business with the most franchises? Subway.

Netflix makes a great burger and even better fries at a great price. But the demand and availability for something other than burgers is coming and coming soon. There is no business shame in being McDonald’s. But America – and the world – does not live on Big Macs alone. And original programming or not, emphasis on movies or TV or not, Netflix’s business model is burgers-only.

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28 Responses to “For The Love Of Netflix”

  1. Chris says:

    I’ve always found food to be a good analogy for many things, but then again, I’m a big ole fatto.

  2. Josh says:

    Just to clarify Netflix was paying at least $30m per year for starz for sony and disney movies so your math is a little off. Also if you’re just comparing that to Disney movie output the alleged $350M is for a lot more content so not really apples to apples. it’s probably an increase of 10-15x not 100x in terms of spending movies alone which may be a little less drastic than is written above.

  3. christian says:

    Every single Netflix story from DP is a variation on “They’re Doomed.” Thus always wrong.

  4. Mike says:

    Isn’t it easier to say that Netflix used to be Blockbuster and now they’re HBO? HBO has never had all the studios and made the shift to original content as a driver for subscriptions. That’s what Netflix is doing now.

  5. Martin S says:

    Dave’s right on this one. They’ve been backed into a corner and the only way out is to scrounge up five million new members a year.

    I’ve done the math multiple times. More debt or a merger are in the near future.

    Smartest move would be to partner with Amazon and make the studios putup or shutup regarding their Everywhere apps. Hulu’s a trojan horse.

  6. CG says:

    For me, the thing that’s always missing in these discussions of Netflix is TV content. That’s most of what most people stream — kids’ shows, older shows, British series, cable shows they missed when they first aired and want to catch up on, etc. And that’s where Netflix is making its initial forays into originals, not movies.

  7. KrazyEyes says:

    All it takes is a cursory glance of Netflix’s streaming content to realize that the Disney deal has not only already commenced but is already starting to dominate the children’s programming content. No Star Wars or Pixar content yet but the back catalog titles and TV shows have been gaining at a brisk pace.

    It’s hard to tell from your article if you realize this and are just referring to a subset of the deal or if you’re clueless about the actual content on Netflix. Either way it makes it hard to take your position too seriously and makes you just as suspect as the media your criticizing.

  8. Martin S says:

    Disney is not the salvation unless they agree to true exclusives which isn’t possible without hurting other Disney divisions. Exclusive SVOD doesn’t mean as much as exclusive SVOD on unreleased content.

  9. Paul Doro says:

    I still love Netflix. I’m watching and really enjoying House of Cards. I just watched The Bay and The Avengers. My kid is loving all the older Disney movies, along with a ton of other content for kids. There is always plenty to watch and I feel like we get way more than our money’s worth.

  10. KrazyEyes says:

    What are your thoughts on Netflix reportedly getting into documentaries and stand-up comedy specials?

    I’ll take a wild guess and say “BAD” but I’m interested nonetheless.

  11. brack says:

    Netflix is still king of online streaming because it is clean and complete, unlike Hulu Plus and Amazon Prime, which can be confusing and not very user friendly.

    The question remains, does it need to try to be everything for everybody? It’s a supplemental service. Cable and satellite just offer more content – period.

    After so many articles written about Netflix, why no mention about who it is really competing with the service? The answer: no one is.

  12. Mike says:

    An important note is the cost. Netflix costs what, $8-$9? That’s nothing. That’s half of what HBO costs. For that price, what they offer is an amazing deal.

    And think about what Netflix offers. They offer reruns of tv shows and movies, with some original content to drive subscriptions. Sounds like AMC.

    Netflix is the first a la carte cable network.

  13. Martin S says:

    Documentaries, like their mentioned news content, is smarter because the costs are dramatically lower than episodic. You could even argue movie acquisitions are a better move. It costs 4mil+ per ep of Cards. How much damage could that kind of capital do in the indie film market?

    Hastings references when HBO started and how they licensed content. But what they owned was Not Necessarily The News, the comedy specials, programs that didn’t have a ton of production costs.

    His only other option is to move into live streaming then sign away UFC or strike a deal with WWE if their cable channel never occurs.

    ————————————————————

    Brack – they don’t see themselves as a supplemental service. Hastings brought Amazon up in the quarterly release, but he refers to pay cable as his competition.

    This is sort of the point of what Poland’s been getting at; people have a perception of Netflix that they do not have of themselves.

    ——————————————————————–

    But 8-9 flat rate barely breaks even with 30 million subscribers. They are not flush in cash. IIRC, the only reason they were net positive last quarter was because of the licensing deals they let expire.

  14. christian says:

    I have 100 films and series in my Netflix queue. For 8 bucks a month. Stop bitchin’.

  15. hcat says:

    Never thought they were competing with HBO, but competing with Comcast. They have set themselves up as the UHF to cable’s broadcasters. Cable will never be driven away (unless it is regulated away, Cable’s biggest enemy is not Netflix, it is McCain and then the content providers) it is one stop shopping for nearly everything you can want. Netflix is the Bargain Bin, older content at a fraction of the price, and as long as you do not need the content fresh out of the oven, its the perfect cable replacement.

    ‘The freakin’ History Channel. How’d they do it?’

    Because they are the dominant force in the cable industry, they get a huge number of eyeballs every night for their parade of hillbillys, so they are able to promote the hell out of their original content. Certainly no suprise they are able to bring the type of numbers in that the Emmys (and the Networks) cannot ignore.

  16. hcat says:

    And I never understood the reports that the Amazon was now competitive since they got exclusive rights to the Viacom stuff that Netflix let go. Its like crowing about dating a girl everyone else has already broken up with.

  17. CG says:

    You’re not a parent whose kid likes to watch Backyardigans, are you, hcat? In seriousness, though Amazon streaming is, for us, a bonus on top of the 2-day shipping. But it’s nice when they pick up stuff we want to watch. It would be nicer if their interface weren’t so clunky and variable by device.

  18. hcat says:

    I am a parent whose kids liked Backyardigans, but when it was gone they just switched to something else, thats the thing about kids content and a major reason I think Disney went to Netflix instead of striking out on their own which many thought they were likely to do. Kids don’t really give much of a damn between one talking animal and another. No Dora, who cares we can just watch Wordgirl (which is infinitly better). Disney made people pay extra for their content before when they started their cable channel as a pay service, people eventually went elsewhere for their kidddie content, the numbers dropped and they switched it to the basic package and made it a success. Thats why they are a good fit with Netflix, people are excited about the content, but they wouldn’t shell an additional 8 bucks a month out for it.

  19. The Big Perm says:

    As pointed out a few times above, looking at movies is only a part of the thing. They only have so many that look okay. But tv shows is where it’s at. I could care less that they finally got The Avengers, but I’m PISSED that I lost American Pickers.

  20. Mike says:

    I think part of the problem is that Hastings sees cable as the competition, but the public doesn’t yet. If he can start to shape that opinion, though, and raise prices on membership, imagine what he could do with double or triple the revenue coming in.

  21. Nick says:

    re: Mike…
    imagine if he built a nuke and threatened america to subscribe or else…

    seriously though, subscription based services are dead in the next few years. everything is going to be single serving. i will not pay for the entirety of HBO but i would pay for a show it offers. that’s where everything is going. the big studios will be able to provide more single options bc of their financial strength.

  22. Mike says:

    Nick, don’t you think if HBO was going to do that, they would do so with Game of Thrones, which is exceedingly pirated? Instead, they’re making their HBOGo app available only to cable subscribers. HBO won’t ever go single serving, and reports of cable’s death are very much exaggerated.

  23. movielocke says:

    they survived a long time with dvd sell through.

    But they died within a year or two of Red box.

    That’s what killed the renters, another form of video rental competition, not sell through. Sell through isn’t competing for the same entertainment dollars as rental, they’re different market sectors.

  24. Triple Option says:

    Doesn’t Netflix need to open up another revenue stream? Basic cable channels have ad revenue as well as carriage fees. Premium channels such as HBO have subscription fees as well as dvd and even syndication. Does Netflix need to sell ads or what?? Is the plan to dish off House of Cards to some other network after a few more seasons? How do they generate significant income outside of subscriptions, or do they? Are they just hoping to reach a certain number of households?

  25. Martin S says:

    Trip – it’s a big part of the problem. Subs cover just enough to equalize operating costs, until license fees jump.

    It’s death by chess. Every move they make has another peril attached to it. Logically, to keep Viacom/Par library, they would have raised rates, but just look at this thread: the love for Netflix is in the pricepoint versus volume. Except one has to give.

  26. Mike says:

    I think they’ve talked about selling DVDs of their originals, like House of Cards, in the same way that HBO does – well after the initial run. Why couldn’t they ultimately syndicate Arrested Development, especially if they do another season?

    Also, I believe the whole reason they’re moving into originals is so they can eventually lessen their volume. They talked about that some when they didn’t renew the Viacom content.

    And who knows when a price increase is coming.

  27. Hcat says:

    And while we always talk about it on the movie side we never talk about the importance of international with television production. In countries that Netflix has not yet penetrated they can sell the broadcast rights to he series. Spacey is a name and the salicious nature of the show all bit guarantees interest (though I could t get past a few episodeS, it really is crap and not good crap like downton or thrones). Was t thrones and galactica international coproductions?

  28. Hcat says:

    But the Viacom issue does add an interesting wrinkle given that Netflix decided they were not worth it and they were dropped by I think Comcast for like a month last year. With all the options content providers might not be in as a strong position as they think.

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It shows how out of it I was in trying to be in it, acknowledging that I was out of it to myself, and then thinking, “Okay, how do I stop being out of it? Well, I get some legitimate illogical narrative ideas” — some novel, you know?

So I decided on three writers that I might be able to option their material and get some producer, or myself as producer, and then get some writer to do a screenplay on it, and maybe make a movie.

And so the three projects were “Do Androids Dream of Electric Sheep,” “Naked Lunch” and a collection of Bukowski. Which, in 1975, forget it — I mean, that was nuts. Hollywood would not touch any of that, but I was looking for something commercial, and I thought that all of these things were coming.

There would be no Blade Runner if there was no Ray Bradbury. I couldn’t find Philip K. Dick. His agent didn’t even know where he was. And so I gave up.

I was walking down the street and I ran into Bradbury — he directed a play that I was going to do as an actor, so we know each other, but he yelled “hi” — and I’d forgot who he was.

So at my girlfriend Barbara Hershey’s urging — I was with her at that moment — she said, “Talk to him! That guy really wants to talk to you,” and I said “No, fuck him,” and keep walking.

But then I did, and then I realized who it was, and I thought, “Wait, he’s in that realm, maybe he knows Philip K. Dick.” I said, “You know a guy named—” “Yeah, sure — you want his phone number?”

My friend paid my rent for a year while I wrote, because it turned out we couldn’t get a writer. My friends kept on me about, well, if you can’t get a writer, then you write.”
~ Hampton Fancher

“That was the most disappointing thing to me in how this thing was played. Is that I’m on the phone with you now, after all that’s been said, and the fundamental distinction between what James is dealing with in these other cases is not actually brought to the fore. The fundamental difference is that James Franco didn’t seek to use his position to have sex with anyone. There’s not a case of that. He wasn’t using his position or status to try to solicit a sexual favor from anyone. If he had — if that were what the accusation involved — the show would not have gone on. We would have folded up shop and we would have not completed the show. Because then it would have been the same as Harvey Weinstein, or Les Moonves, or any of these cases that are fundamental to this new paradigm. Did you not notice that? Why did you not notice that? Is that not something notable to say, journalistically? Because nobody could find the voice to say it. I’m not just being rhetorical. Why is it that you and the other critics, none of you could find the voice to say, “You know, it’s not this, it’s that”? Because — let me go on and speak further to this. If you go back to the L.A. Times piece, that’s what it lacked. That’s what they were not able to deliver. The one example in the five that involved an issue of a sexual act was between James and a woman he was dating, who he was not working with. There was no professional dynamic in any capacity.

~ David Simon