This is another step in the direction things are heading… one I didn’t really expect.

The Criterion Collection, the dominant cineaste’s Home Entertainment label, is moving to Hulu after about 18 months streaming on Netflix. And they are moving the whole thing. Over 150 titles right now. And over 800 titles, once the last of what Netflix’s streaming rights expire.

Why?

Because Netflix is spending so much on its other content deals, now all quite expensive, that a mid-range deal like Criterion is too expensive and not highly prioritized enough to get done. That opened the door for Hulu.

But here is my take… in a few years, Criterion and the like will be all that is left to Netflix… and depending on how the business model evolves – remember, Hulu is owned by studios – perhaps to Hulu. Some business will have to be the streaming home of indie product. The numbers will not be nearly as big as for mainstream product. But it will be a viable business because, like Disney and kids, the loyalty to high-end product is enough to drive subscriptions. Not 30 million subscriptions. But maybe – pulling a number out of the air – 5 million… when combined with other product?

There will come a tipping point studios and library owners see the potential for more profit in making their product available directly and not through Netflix, which cannot afford to keep expanding their slice of the market or to pay the kind of rates it is now paying for a slice of the market. And keep in mind, only starts streaming after DVDs are released and sometimes 28 days after that.

And when that day comes, if Hulu remains aggressive or other players make serious entries into the business, Netflix will be left with either a very small slice of the market or be forced to sell itself – essentially, if not literally – to one or two studios to front what will essentially be an in-house post-theatrical streaming business. That’s when content like Criterion will be critical.

What a lot of people seem to forget about the internet is that it isn’t brand loyal. It’s true that there may not be a clear Sony brand, for example, that screams to people to buy a channel of only Sony product. But on the web, packaging is a matter of will, not real estate. Somewhere, there is a server that holds this studio’s movies (and TV shows) or that studio’s movies (and TV shows). You want all the studios? Here’s a price. You want 3 of the studios? Here’s a price. Just 1? Here’s a price. Set-up doesn’t require a proprietary wire going into your house. Access is not any more challenging than a strong wi-fi signal.

As long as Netflix feels to people like the cheapest, most complete way to access movies, they will have a massive subscriber base. But that reality is becoming less true and the illusion, as they spend more and more for content, is becoming harder to maintain. Losing Criterion is a big deal to people who love movie history. Netflix is one step closer to really streaming aging content from studios that is available on a somewhat inconsistent basis.

Some have painted me as a Netflix basher. But I’m not. I’m just a realist. The only way Netflix 3.0: The Streaming Era really works is with a lot more subscribers or a lot lot price for the content they are streaming. And if that price comes down, some studios will find that tipping point and stop making their product available to Netflix to stream. It’s not an attitude about Netflix. It’s just math.

There will be plenty of streaming. More than you ever imagined. And with better quality to more devices. But to stay alive in the market that they led experimentation into, they are going to have to have yet another great idea that keeps them from being cannibalized by their current content providers.

“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.

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