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David Poland

By David Poland

Netflix, Nielsen, and The Elephant In The Room

The Wall Street Journal broke the news that Nielsen will attempt —and likely claim to be 96% accurate regardless—to measure Netflix, Amazon Prime and other streaming viewership numbers using a clever technical trick. Of course, the focus is on knowing what Netflix numbers are to figure out how to best manipulate advertisers on traditional ad-driven television as ratings drop.

Big picture, we are told in the WSJ article, is that content owners are trying to figure out if Netflix cannibalization of their MVPD (cable/satellite) ratings is costing them money versus the prices being paid by Netflix, which are quite high, but perhaps not high enough.

Is this another tipping point? Could be. Might not be.

I think everyone agrees that the genie is out of the bottle. Streaming is not going away. But the issue isn’t really Netflix, but the long tail. Broadcast networks, owned by content producers all, aren’t competing against Netflix and the other streamers. They are competing against reruns. Yes, a new Netflix show may get a lot of attention and even a lot of eyeballs in its first month of release. But that’s not, if reports are to be believed, keeping Netflix on the average subscriber’s TV 60 hours a month. Some docs. Some movies via various movie deals. But mostly, it’s television reruns.

And here is The Elephant.

Netflix doesn’t come close to having the entire back catalog of content. I would guess—and mind you, it is just an educated guess—that Netflix content, as massive a bundle… uh, package as it is, is less than 10% of the television catalogs available. And less than 2% of the movie catalogs.

Netflix has been a great piece of business for content owners. Streaming and the subscription-based financial model are a major paradigm shift. But as the DVD sell-thru business peaked out, there was a softer landing thanks for Netflix and the other streaming companies that followed and also spent wildly. Now, the content creators are waking up to The Elephant… what to do with all this catalog content that isn’t generating revenue now?

Everything on demand was mostly inconceivable any time before 2000. Remember, consumer VHS is less than 40 years old. DVD is less than 20 years old. The tech for more and more streaming is still developing. The single moment viewership of the broadcast networks are still more than the internet can effectively handle. Every time viewership for an event online exceeds a couple of million, the trouble seems to begin. That has improved and will continue to improve. But that’s just normal progress coming. Different, less invasive issue.

There is a lot of chatter—endless chatter—about giving consumers what they want. Well… it’s simple. Consumers want whatever they want within seconds of realizing they want it in the absolute best visual and audio quality in which it is available and for free.

So, let’s take “free” off the table.

Households are spending $80-120 a month to feel like they have the maximum amount of content at their fingertips. Some pay less. Some pay more. Some don’t buy any of it. But basically, that is the range. That is the market. In the US, say $90 a month in 90 million homes makes for a $100 billion a year business opportunity. There are more dollars in both software and hardware, but those (like theatrical movies) are extra opportunities, not the biggest bite.

How many people are watching Netflix and how is that affecting ratings on TV Show X could well be a $25 million a year issue for a network. That’s not nothing. But the big issue isn’t over tens of millions, but tens of billions.

For a big company with a big library, like any of the major studios or Lionsgate, aside from math quibbles over which outside businesses get paid what on which pieces of content, the goal is to maximize the value of that library in any and every way possible. There is nothing siting in the vault accumulating value by being unavailable anymore. Yesterday, there was a press day in Hollywood for a Stanley Kubrick package of films released on Blu-ray… which they have already released a couple times. I’m sure there was some new tidbit in there, but DVD/Blu-ray maximized the opportunity to close to the final degree years ago. The only thing left to do is to invest millions in restoring a lot of films to their original glory. But, sadly, that is becoming a niche business as well.

The simple and incredibly simplified math on Netflix is that it has about a third of US TV households signed up, generating about $3 billion a year and spending about $2 billion a year on programming. That is about $60 a year in content spending per household served. Obviously, this is not a big enough boat for everyone to get aboard. And even if the subscriber based tripled, which has been Netflix’s long-term plan (according to them, on record), it’s still not nearly big enough for everyone.

There are many big players invested in the various ways of selling content. But for library owners, there is only one issue. Again… maximizing revenues for that forever aging content.

Netflix knows that. The reason Netflix is experimenting so aggressively is not because there is a business model in which, for instance, day-‘n’-date theatrical/Netflix release makes sense in a way that will really threaten wide-release theatrical films. They are looking for their next model, for two reasons. First, they know that much, much more aggressive competition is coming. The more Netflix grows, the more quickly and aggressively direct competition from the major studios will come. Second, they have first-mover advantage at this point. But in order to keep it, they need to continue to be seen as innovative.

But the real onus is on the television networks and movie distributors. They each have similar revenues to Netflix and a constantly changing profile of how they generate revenues. And there are a ton of deals already in place that have end dates that need to be lined up before they can be leveraged. But there will be a tipping point.

If, say, CBS, could start a streaming platform with shows they have dealt to Netflix, like Cheers, Frasier, Twin Peaks, Family Ties, The Andy Griffith Show, Star Trek, Twilight Zone, Hawaii Five-O, and so many others, plus newer shows, plus the Showtime catalog, plus (assuming Sumner Redstone can muster the strength to bring the two sides of his company in line), the Paramount film catalog and the Nickelodeon catalog and the MTV catalog, etc, etc… and they charged half of what Netflix is charging, could they get to the same 35 million subscriber plateau in a hurry and generate $1.6 billion a year and have complete control of their content?

Thing is, that probably isn’t enough to entice Viacom to make the move right now. But triple that number to 105 million homes and $4.8 billion… all on library content. CBS generates about 3x that, but its costs are so significant that it “only” nets about $1.6 billion a year.

Imagine a world with 5 “Netflixes,” costing about $50 a month and live ad-supported TV costing another $50 a month and you might be looking at the not-so-distant future. Upgrade to ad-free TV (except for live programming) for another $40 a month (or another $480 million each year per million subscribers coming to the provider) and you can imagine the opportunity.

Of course, it will likely be some variation in my imagination and/or others. But my point is, there is a lot of potential revenue out there and it has not begun to be mined in depth by Netfilx or Amazon or any combination of these companies. That revenue, not consumer wishes, will drive the future.

But we are waiting for the tipping point. And when it comes, the networks will stop picking Netflix’s nits and mind their own.

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17 Responses to “Netflix, Nielsen, and The Elephant In The Room”

  1. Rena Moretti says:

    What you have to realize is that the “prices” we are quoted in the press for what Netflix buys are not real.

    The real prices are very likely a lot smaller (no reason for Netflix to pay these absurd prices for mega-flops like Gossip Girl nobody wanted to watch in the first place..!)

    DVD and Blu-Ray is becoming a “niche business” only because new movies are terrible and people don’t want to buy them or even rent them (why do you think Netflix is moving to making its own content – because renting movies is a great growing business?) and because Blu-Ray prices and lack of availability of good material (every low-rated TV show flop gets an immediate Blu-Ray release, but not the very few real hits) made it that it never caught on with the general public.

  2. David Poland says:

    I can’t speak to prices for any specific show, but I can tell you that the massive spends for packages are not at all unreal. They are paying over retail.

  3. Mike says:

    I don’t think people care what’s on Netflix, so much as there’s SOMETHING they want to watch. I have both Netflix and Amazon (and the broadcast networks over the air) and it feels like more content than I could ever possibly watch.

  4. Stella's Boy says:

    Exactly Mike. I’ve got hundreds of stuff in my Netflix queue. I’ll never be able to come close to watching it all. There’s plenty of good stuff to choose from, movies and TV.

  5. Geoff says:

    If Neilsen is really going to try to be THIS thorough, are they also going to find a way to track viewership for online delivery systems like HBO Go and Showtime Anytime?

  6. Hallick says:

    “DVD and Blu-Ray is becoming a ‘niche business’ only because new movies are terrible and people don’t want to buy them or even rent them”

    This statement isn’t any truer today than it was during the glory days of DVD sales. Come on now.

  7. Jermsguy says:

    Aw, man. changed their layout. Less functional, more graphic-y.

  8. John Rieber says:

    your analysis is exactly right. When the content creators determine that their own distribution models are ultimately more profitable than “license” deals to non-creators, then companies that only show other people’s content will no longer be able to license that content. And if new AND library programming can be “bundled” onto a service of, for example, ALL Sony content all the time – and as you say, the money goes right to Sony, then Sony will no longer sell it elsewhere….a changing paradigm that Netflix has to acknowledge and counter…great article.

  9. Eric says:

    I agree with the general notion that the studios will eventually offer their own streaming services, but I think there’s one problem yet to be resolved. People don’t want to sign up for a dozen different services and use a dozen different apps to access movies and TV shows. That’s a pain in the ass to set up, to pay for, and to browse.

    I think we’ll probably end up with one consolidated service from which you can buy monthly access to whichever studios’ libraries you want. If you want Sony, add $7.99/month to the bill; if you want WB, add another $7.99/month to the bill; and so on.

    Whichever company can set up the infrastructure for this, and get buy-in from all (or most) of the studios for this model, will win in the end. I’m somewhat surprised Netflix isn’t already offering it. (Didn’t they have a Starz add-on for awhile, kind of like this?)

  10. leahnz says:

    can you ask Netflix (and the others) to please make their streaming mondo international while you’re at it, if suggestions are being made (you can fake them into it already using one of those cloaking device things so they might as well just go the whole hog themselves and do it legit, probably make more $ too)

  11. JS Partisan says:

    David, the amount of infrastructure that is required to make a streaming business, will keep the studios from committing. It makes, and will continue to make more sense, for these studios to sell their content to some streaming service that already has invested in the server farms, and spent the money to keep the internet companies at bay.

    Sony has Crackle already, and that really hasn’t taken off. Until some company gets all the studios to stream all of their back catalog and current content. You and many others need to accept, that this is a Netflix world, and it’s what people want to use above all else.

    Oh yeah, I am going to buy a Boyhood blu-ray, and beat you about your nonsensical “ALL MOVIES SUCK” head. What the studios seem not to get, is their price for these films on blu or DVD, is 6 to 10 bucks too damn high.

  12. CG says:

    What about double-dipping? Right now there are any number of TV shows on Netflix AND Amazon AND Hulu, for instance. Are studios making three times as much as they would from selling streaming rights to just one outlet?

    Also, is there any evidence studios don’t simply see streaming as another syndication opportunity?

  13. Brady says:

    “Oh yeah, I am going to buy a Boyhood blu-ray, and beat you about your nonsensical “ALL MOVIES SUCK” head. What the studios seem not to get, is their price for these films on blu or DVD, is 6 to 10 bucks too damn high.”

    Truest statement I’ve heard in months. I have to laugh at myself when I buy a Blu-Ray from Best Buy that I’ve owned on other formats five times over, just because it’s 9.99. Alien set is 9.99 at my local BB btw.

  14. RP says:

    DP, FYI that CBS *has* in fact launched a streaming service:

  15. David Poland says:

    I know, RP. I used it for a week. It’s many things that will not play well to a broad base. Expensive and limited content. ABC’s been streaming for a year, but only through MVPDs and for free. Neither has shown that a significant percentage (20%?) of a large (10 million?) people watching at the same time will hold up technically. Perhaps the most interesting example to look at is NFL Sunday Ticket’s internet stream, but the details aren’t available and it is often glitchy… or at least, a lot more glitchy than the TV.

  16. Christian says:

    “Why Netflix Is Just About To Fail” vol. xxxiiii

  17. David Poland says:

    Classically you, Christian.

    I have never said once that Netflix would fail. What I have said is that the price on the stock market is insane and that there will be competition in a big way… something Netflix has said itself, repeatedly, but gets lost in all the hype of hyper journalists impressed by any shiny new object.

    Your comment reminds me why people remain ignorant then get surprised when things happen that aren’t very surprising.

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