INDEX

“So It Begins” – Netflix’s Journey Towards the Pay-TV Precipice

Sept. 2, 2011, 12:09 p.m.
Michael Inouye, Principal Analyst

Share:

​Despite Netflix’s recent decision to split the hybrid $9.99 plan into two discrete tiers (streaming only and DVD only, each priced at $7.99 per month), which was intended to generate additional revenue as a means to secure additional streaming content, it looks as if the service might lose content from Starz come February 28, 2012 when the current agreement expires. While the cessation of Starz content on the streaming service is not an absolute certainty (different arrangements might be reached between now and Feb 2012), Starz recently ended licensing negotiations with Netflix, having presumably reached an impasse on the value of said company’s content. Netflix’s stock naturally declined following the announcement, but is this just a quick reaction to bad news, or does this portend a more arduous future than the gilded road the company had seemingly been walking on?

Netflix is encountering many of the same roadblocks or hurdles faced by other streaming services before them and while the company’s large installed base insulated the company for a time, the realities of the video market are starting to come to light. Hulu stands as a prime example of the difficult negotiating process between streaming company and content owners when one considers the difficulties Hulu had negotiating for content with its stake holders. Others like Google TV arrived as a lame duck (in terms of content) after content holders largely refused to support the platform. It is clear the content owners are working diligently to maintain the premium image of their product and this commitment will ultimately force companies like Netflix to make a tough decision – either maintain a complementary status to the pay-TV operators or take the plunge and become a pay-TV operator itself.

While this might not reach the level of a “Virtual Multichannel Video Programming Distributor (VMVPD)” it will likely mean pricing similar (or equivalent) to a traditional pay-TV operator. In other words if consumers want the content they will pay for it one way or another – be it through a traditional MVPD or a service like Netflix. While Netflix continues to mention their customer base’s penchant for “older” content (in terms of streams served) it is foolish to assume this is a viable long term strategy.

Netflix has rather brilliantly spun changes to their service as fittingly appropriate to the behaviors of their customer base. The 28 day window delay for new content was brushed off by stating their customers’ proclivity for older content - a large portion of the content sent out to customers was older content. But the reality is many customers who selected newer releases often had to wait for said content to arrive and in the meantime received older movies from their queue instead. In addition new movies (that customers want to see) are not released every month, let alone weekly, so to get the value out of their monthly subscription fee many consumers also added older movies to their queue. To say customers prefer older movies to newer is not entirely accurate.

Now with Starz, Netflix was quick to point out that Starz only accounts for 8% of viewing, down from a peak of 20%, but again this fails to adequately address the real problem. The peak on Starz viewing likely occurred not too long after the initial deal was put in place and to discount 8% of viewing is foolhardy – Netflix does not add new content at a robust rate and the fact that subscribers were still watching Starz content at near 10% of the total volume suggests that consumers still felt it was valuable enough to revisit previously viewed shows/movies from the Starz library. Granted Netflix will likely take the funds earmarked for Starz and put it elsewhere, but securing another pool of Japanese Anime will only cater to a niche segment (yes I’m being facetious to some degree).

In the end Netflix will likely have to raise the monthly subscription rate in order to secure better content and while this could come at the cost of fewer subscribers this will nonetheless be a necessary move if the company wishes to continue as a significant player in the streaming video market. Netflix will have to lose the illusion that the size of their customer base (which could very well start declining) will force the video industry to move at its command or that customers will always be there – otherwise the company stands the risk of becoming the next Blockbuster Video.