Movies should be free as in markets

Next week, Netflix will be added to the S&P 500, while the New York Times Co. will be dropped, which is being seen as (altogether, now) a sign of the times. But the cozy business model Netflix has set up for itself — backing into a streaming media business that now outweighs its physical disc business, due to industry and consumer ignorance at the time the original deals were struck — may be on the way out. Despite having rebuilt the video rental business in its image, Netflix faces two major challenges in the near future.

The first is that their original licensing deals are about to start expiring in bulk. Studios were willing to sign over streaming rights quite cheaply back when there was no streaming market to speak of; they won’t be so eager now. For one thing, the booming market for streaming content makes those rights much more valuable than they once were. This is particularly true as non-PC media consumption devices — video game systems, netbooks, tablets, phones — become more and more a part of consumers’ TV- and movie-watching habits. But on top of that, Netflix isn’t doing anything with their streaming business that the studios don’t think they could do themselves. Indeed, this is the entire rationale behind Hulu — why let Amazon or Apple take a chunk out of a one-time sale, or Netflix take a chunk out of the subscription fees? Anyone can put bandwidth and storage space together, right? This is a simplistic take, of course, which ignores the ability to build a working business model, to create a functional user experience, etc., but those are in some ways ancillary to simply having a lot of content already on hand. Hulu even manages to start eroding the one major advantage Netflix has over any studio-operated competitor, which is that it doesn’t just have one studio’s content. If any major studios decide to walk away from Netflix, the difference in content availability becomes narrower.

Meanwhile, just as Netflix is using streaming as a way to hedge their bets on the future of postage costs, the future of bandwidth costs is uncertain, as well. When a major ISP decides to seriously challenge the de facto doctrine of net neutrality, Netflix is likely to be an early target. They’re a major user of bandwidth, and unlike some of the other likely targets — YouTube, Hulu, ESPN — they don’t have the backing of a giant company (that is, giant relative to S&P 500-member Netflix) or of a company with an existing relationship with the cable companies that dominate the ISP sector. Similarly, when a major ISP decides to go to metered usage — as many wireless carriers have already done — Netflix is going to suffer. If your $7.99/month “unlimited” streaming plan from Netflix requires you to add $30/month to your cable bill to get all the bandwidth you need, it suddenly becomes a lot less attractive.

The common denominator here is that Netflix has opened up a potentially huge new revenue stream for the movie and TV industries, and the existing power-players have a lot of incentive to shove their way in. They might enter as competitors, they might insert themselves as middlemen, but one way or another, they’re coming.

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