Where Will Netflix Go From Here?
With the dust only just beginning to settle from Netflix’s recent mad, back-and-forth scramble of changes to its business model, it’s a good time to ask where the entertainment service might end up in the long run. Here are three possible “end games” (if there is such a thing as an end game in the dynamic world of media):
1) Netflix becomes a major producer of premium content and distributor of other producers’ premium content (like HBO/Showtime).
- This is an option requiring expensive investments, yet the HBO and Showtime models have proven there is a market for high-quality, original, uninterrupted content at a premium price. Unfortunately, Netflix has established itself as the low-cost alternative to cable television, and the recent outcry from customers on price-hikes and the just-reversed separation of streaming from DVD-mailing services show that its customer base of 25 million expects a lot, for not much money. Can Netflix function like an HBO (26.8 million subscribers) without the residual income of per-subscriber carriage fees and the efficiencies of letting cable/satellite operators handle distribution? It seems unlikely today, and since Netflix is built on a progressive distribution model and a very low price point, it would need to prove it could handle a serious loss of cost-conscious customers and still be profitable.
Netflix will learn a lot about this path forward from its estimated $100 million investment in the 26-episode “House of Cards,” with director David Finch and star Kevin Spacey. The recent decision by Starz to drop Netflix as a content distributor (this includes Starz access to Disney and Sony Films) makes it clear that studios and production houses are casting lots with the established revenue streams of cable and satellite distributors, and pulling back on other distribution channels. Until the next generation of T/V (Television/Video) consumers do some major cord-cutting from Cable and Satellite operators, it will be very difficult for Netflix to outbid them for programming. Becoming a producer of content can, however, open Hollywood doors for Netflix as it has done with HBO and Showtime, so this scenario and the “House of Cards” experiment bear close watching.
2) Netflix remains a neutral, online (including mobile, tablet and Internet-connected television) distributor of any T/V content produced elsewhere (like Amazon).
- Should the “House of Cards” investment reveal a lack of viability for Netflix in a producer role, the company will need to set its cap on competing with Amazon. Amazon’s new Kindle Fire tablet launch with its own software platform seems to be taking a page out of Apple’s template, and a clever pricing plan, Amazon Prime -- which offers free shipping and free video streaming for $79 a year -- makes for formidable competition. Now that first-run premium content is out of the picture for both Amazon and Netflix, second-run, third-run and vintage content becomes the primary business -- a small margin one at that. There may well be a viable global business for “long tail” customers who seek out obscure or rarely seen films and TV shows, or are happy to wait until the original release windows pass to view more current programs at less cost. But with Amazon’s head start as a retailer with streaming services and hardware offerings, Netflix faces another uphill climb.
3) Netflix licenses or even sells itself to Canoe Ventures (owned by all the major cable system operators in the U.S.) as a clearing-house operation for cable and possibly satellite distributors, so they can get “TV Everywhere” VOD content nationally to all qualified cable subscribers in the U.S. on a common technology platform, while setting up similar relationships abroad.
- Though this “if you can’t beat ‘em, join ‘em” solution may seem far-fetched, it might just be the kind of out-of-the-box thinking that Netflix is known for. It would allow for other Over-The-Top (OTT) providers (Roku, Boxee, Amazon, Wal-Mart’s Vudu, Apple TV, Google TV etc.) to fight for the “long tail” business, and keep Netflix in the premium distribution business. Canoe Ventures’ search for a “national footprint” for verifiable VOD has been elusive. Unified specs for the many different cable systems opens up the giant revenue stream of TV advertising. It could also open the door for Netflix to negotiate access to, and create a business model for, more premium content for non-subscribers, hopefully with a more favorable release window and with operator “skin in the game.” It creates a growth opportunity or at least a defensive maneuver for the cable/satellite companies. With proliferation of tablets as a new platform for viewing, this could make sense for all involved.
Netflix is like the American Football League (AFL) of the 1960s, trying to compete with the established National Football League (NFL) (represented in 2011 by the cozy cable, satellite, broadcast industry). Still, the newcomer’s record of attracting customers, like the old AFL, makes it hard to ignore. Not only did the AFL survive, but in the end it merged with the NFL, and both AFL and NFL owners partook of the greatest sports, television (and one of the greatest business) bonanzas ever.
This is an exciting story, promising to be riveting to the very end. As Terrell Owens used to say, “Get your popcorn!”