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David Poland

By David Poland poland@moviecitynews.com

The Evolution Of Netflix

“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.

In 1997, Netflix and Reed Hastings came up with an absolute game changer. Because of DVD being more durable than tape and being flat, there was a business to be done renting movies by mail order, made even cooler by the use of the web as the ordering platform. But the even bigger idea was subscriptions over individual rentals. Even without special deals with the studios, which Netflix wouldn’t start doing for years, the cost argument made sense. Margins were thin, but profit was viable. By the time Blockbuster got into the flat-rate business, their brand was tainted and the company flailing about, experimenting in public, smelling of desperation, was not encouraging. Wal-Mart got out – the margins weren’t worth their time – before they really got started.

Great. The studios were happy to have another customer in Netflix, DVD sell-thru continued to be the cash cow of all cash cows, and Netflix was a blip on the radar.

And then came the DVD sell-thru maturation. Studios ran out of TV library to keep overall DVD sales looking so healthy and the collecting game slowed dramatically. At the same time, even after the Blu/Red wars ended, hi-def DVD sales were slower than hi-def TV sales.

That’s when the panic really began. And with the panic, studios actually started paying attention to Netflix, which by the way, was getting ambitious and cutting its own throat a little with experimentation of how to be a content provider and not just a procurer, thinning their bottom line.

Streaming has been Hollywood science fiction for a long time already. A potential holy grail. But with a very limited to-computer market, even with iTunes having some success, and a never-quite-what-they-hoped PPV market on cable and satellite, if the technology ever caught up, however would it fit into the model.

Thing is, streaming was one of Netflix’s more successful experiment. A significant portion of their library was made up of films whose streaming rights were rather inexpensive to acquire. And on top of that, STARZ put streaming into their deals with Disney, Sony, and other smaller entities when no one was really streaming… and did a deal with Netflix as streaming was building. This eventually let to some discomfort between Disney, in particular, with STARZ, but they worked it out… for now. The STARZ deal with Netflix ends in 2012 and a renewal will, without question, cost significantly more than the EPIX deal… IF Disney even wants to play the streaming game by then.

But I’m getting a little ahead of myself…

Streaming started taking off for Netflix, where they worked out the bugs, making it work technically, and then got ahead of the curve by making an aggressive push to make the technology easily accessible on your TV and not just your computer.

A double edged sword.

By making streaming work, Netflix showed the studios how streaming could work. All of a sudden, studios knew they were/are a non-copyrightable technology fix away from doing whatever they want with the content.

The Netflix stock price has taken off. Media is in love with any new tech that allows us to sit on our ass and get more for less, rarely considering what that proposition means. We’re so excited that we haven’t really noticed that streaming has been and still is, for studio product – and that’s what drives the business, whether we like it or not – months after DVD release and rental availability. It’s the third, and nearly final, window.

So for instance, the newest Disney title on Netflix is Alice in Wonderland. Released on March 5, on DVD June 1, and premiering on Starz & Netflix on Nov 1, five months after the DVD window opened… and that was the short DVD window, as you may recall. Disney’s next release, Prince of Persia: The Sands of Time, went into release on May 28, went to DVD 16 weeks later (Sept 14), and Starz has no premiere date listed, but I would expect it in late February/early March on both the pay cable network and Netflix. You can get the movie from Netflix now and for the last 2 months, but only on DVD, which Netflix would prefer you not to prefer.

I can’t really explain why the media so overstates the realities of Netflix and the potential of its future. Assuming it survives, it will not be ubiquitous. Even the NYT article, though it seems to want to say otherwise, allows that the studios will do their own thing in time. And they will. Netflix did pave the way… they made it clear that it could work. But the technological bar to make this work for the studios is low enough that the only issue for them cutting out the middle man will be marketing. And Netflix will have some value in that regard.

But if I were a betting man, I’d bet on the $7.99 price point becoming the jumping off point for a cable-like a la carte program, as soon as they try to close Starz, in which you pay a few dollars more for Disney, a few dollars more for Sony, etc, get better access and end up with a bill back up in the high teens. Or not. It’s really not up to Netflix. It’s really up to the studios. Disney is the one with the most obvious ability to convert their fans into buyers of streaming at $7.99 a month or more for their product alone. And that economic reality will make doing deals with any middle man, which Netflix now is, less and less attractive for the studios.

13 Responses to “The Evolution Of Netflix”

  1. A. Campbell says:

    I can’t go Netflix streaming-only because there’s too many *catalog* titles that don’t stream. Now, I’m not the typical consumer. But I think you’re missing one thing, Dave. Remember that at any given time, 80% of Netflix’s offerings are out to subscribers? The average Netflix viewer is going deeper into catalog than the average Blockbuster renter was. The effect of this, when it comes to streaming- speaking for my own household and those of several friends -is that I don’t care so much that new titles aren’t available to stream. There’s thousands of movies and shows to watch anyway, and often the viewer is not looking for a specific title so much as just “something to watch.” (Can’t tell you how many movies I’ve started and abandoned, just for time’s sake. It’ll remember where I left off anyway.)

    This doesn’t mean that I’ve stopped buying DVDs/blu-rays, or going to the movies. But it *does* mean that the titles I want to own almost exclusively have added value (Criterions). And before I buy a $30 disc, I ask myself, “When I want to watch this in the future, can I wait 2 days for this to show up in the mail?” Increasingly, I won’t even have to wait 2 days because things are streamed from _somewhere_ or other.

    If I were Netflix, I’d pay very, very close attention to what subscribers are watching and make sure to supply more and more of the same. And I suspect that what people are watching on Netflix- which is basically a cloud-DVR service, and becoming moreso -doesn’t look like a list of top-grossing or award-winning movies. It looks more like TV.

  2. mutinyco says:

    I think the studios are idiots if they want to do their own thing. With the exception of Disney, there’s no movie brand loyalty for consumers. They don’t know or care who makes what. That’s why we have multiplexes that play movies from multiple studios, why we have cable networks that show movies from multiple studios, why brick and mortar rental stores rent movies from multiple studios, why Amazon sells movies from multiple studios…

    Nobody cares who made it. If the studios don’t get this, then they’re being arrogant.

    Netflix is pretty perfect for what it is. I get both DVDs and watch streaming. Best of both — if one delivery doesn’t have it the other will.

    But Netflix’s success wasn’t built upon new releases — that was Blockbuster’s strategy, and it worked for a long time. For a while with Netflix, it was difficult to get new releases because they’d all be out, but it didn’t stop their success. Because their success was built on catalog movies — the fact that a warehouse could stock a greater selection of titles than a brick and mortar Blockbuster store. And by doing that, it also made it easier (and cheaper) for people to see more obscure titles without having to buy them, which, in the days of Blockbuster, was usually the only way.

    Everybody I know does Netflix at this point.

  3. christian says:

    As long as Netflix kicks up the quality of their streaming titles and keeps up the wealth of unavailable titles…that’s a bingo.

  4. Foamy Squirrel says:

    Following on from Mutiny’s point – more that nobody cares who made a given movie, nobody knows either. I don’t think anyone will bother to search the various individual studio interfaces to try and find out to whose library it belongs, when they can just go to Netflix and find it in a matter of seconds.

    I’ve been saying it for a while – the thing that’s going to stop studios from getting into the streaming business themselves isn’t a delivery barrier, it’s a CRM barrier. Netflix has the capacity to sell the studios’ product better than the studios ever will because they have both the scale and the investment in customer data – it’s the same reason why Walmart gets to dictate terms to product suppliers rather than the other way around.

    Edit to add: it may be that studios will do it anyway, but without a way to recommend Rom-com A by Studio X to the guy who just watched Rom-com B by Studio Y with his new girlfriend, they’re going to miss out on a lot of potential revenue.

  5. t.holly says:

    You really need to bring on-demand into this “cable-like a la carte program” discussion.

  6. L Brecken says:

    The studios already have streaming sites up so whats this debate about….HBOGO.COM, CINEMAXGO.COM, STARZPLAY via VZ, EPIXHD.COM….the evolution to the internet does not change their model it just lowers the delivery cost for studios. Further as the medium becomes ubiqitous and commoditized to offer streaming directly with cable or NFLX is the way all media has evolved in the past. EPIX for example said they plan on keeping the HD rights on their site and never licensing them out. That sure sounds like they are doing it themselves and creating a HUGE problem for NFLX.

  7. hcat says:

    Netflix is setting themselves up as a landing pad for studios seeking a cable alternative. Netflix’s audience has got to be what 6 times the amount of Epix’s subscribers? Epix won’t last five more years (after the tiny Paramount and non-exisistent MGM slate all subcribers are paying for is a premium channel of Lionsgate movies), and it is completly concievable that Summit would jump from the Showtime ship if they could get a Relativity type deal. The premuim cable channels will live and die on thier original programming, as this drives the rates they pay for theatricals down, Netflix will be able to scoop up more and more and go from a partner to a competiter.

  8. Paul MD (Stella's Boy) says:

    My wife and I have Comcast and don’t have EPIX, but my in-laws have Fios and EPIX. Every few months I flip through EPIX offerings and see that it is always exactly the same with the addition of 1 or maybe 2 movies. This time it was Daybreakers. A few months ago it was Star Trek. A few months before that it was My Bloody Valentine. Other than that their schedule does not change at all. So you’re paying $14/month or whatever for maybe 1 or 2 new movies monthly? Seems like a ripoff and not worth it.

  9. hcat says:

    So here’s a hypothetical: Suppose when renegotiation happens with Starz, they want to greatly increase the premium that Netflix will pay for their service (which they were not making a dime on since no one took advantage of Starzplay until Netflix got a hold of it). Netflix decides to instead offers Sony the same package they get from Starz basically grabbing Sony’s premium cable window (this is a price increase for Netflix but how much could Sony make from Starz, doesn’t it cost like $3 a month?).

    Since they are not known for their original programming and leaving them with only the Disney Dozen, this could significantly cripple Starz.

  10. hcat says:

    We had Epix free for three months when it was introduced and yes there was nothing new to watch. Their On Demand was exceptional since it had all these UA and Paramount from the seventies but outside of fogies and film geeks nobody is getting excited over seeing that Breakheart Pass is availible at the click of a button.

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“When Bay keeps these absurd plot-gears spinning, he’s displaying his skill as a slick, professional entertainer. But then there are the images of motion—I hesitate to say, of things in motion, because it’s not clear how many things there are in the movie, instead of mere digital simulations of things. It doesn’t matter. What matters is that there’s a car chase through London, seen from the level of tires, that could have gone on for an hour, um, tirelessly. What matters is that the defenestrated Cade saves himself by leaping from drone to drone in midair like a frog skipping among lotus pads; that he and Vivian slide along the colossal, polished expanses of sharply tilting age-old fields of metal like luge Olympians. What matters is that, when this heroic duo find themselves thrust out into the void of inner space from a collapsing planet, it has a terrifyingly vast emptiness that Bay doesn’t dare hold for more than an instant lest he become the nightmare-master. What matters is that the enormous thing hurtling toward Earth is composed in a fanatical detail that would repay slow-motion viewing with near-geological patience. Bay has an authentic sense of the gigantic; beside the playful enormity of his Transformerized universe, the ostensibly heroic dimensions of Ridley Scott’s and Christopher Nolan’s massive visions seem like petulant vanities.”
~ Michael Bay Gives Richard Brody A Tingle

How do you see film evolving in this age of Netflix?

I thought the swing would be quicker and more violent. There have been two landmark moments in the history of French film. First in 1946, with the creation of the CNC under the aegis of Malraux. He saved French cinema by establishing the advance on receipts and support fund mechanisms. We’re all children of this political invention. Americans think that the State gives money to French films, but they’re wrong. Through this system, films fund themselves!

The other great turning point came by the hand of Jack Lang in the 1980s, after the creation of Canal+. While television was getting ready to become the nemesis of film, he created the decoder, and a specific broadcasting space between film and television, using new investments for film. That once again saved French film.

These political decisions are important. We’re once again facing big change. If our political masters don’t take control of the situation and new stakeholders like Netflix, Google and Amazon, we’re headed for disaster. We need to create obligations for Internet service providers. They can’t always be against film. They used to allow piracy, but now that they’ve become producers themselves, they’re starting to see things in a different light. This is a moment of transition, a strong political act needs to be put forward. And it can’t just be at national level, it has to happen at European level.

Filmmaker Cédric Klapisch