Netflix, Inc. (NASDAQ: NFLX) appears to have united just about everybody but its customers to curb the company’s growing power. The latest foray comes from the Starz pay-cable TV channels, owned by Liberty Media Corp. (NASDAQ: LINTA), which will delay new episodes of its original shows for 90 days before sending them to Netflix. HBO, owned by Time Warner Inc. (NYSE: TWX), doesn’t license any of its content to Netflix and Showtime, owned by CBS Corp. (NYSE: CBS), will not make current shows available either.
This follows a decision last November by Comcast Corp. (NASDAQ: CMSCA) to charge Internet broadband provider Level 3 Communications Inc. (NASDAQ: LVLT) more for the amount of bandwidth demanded by Level 3 customer Netflix. The fat pipes providers want more money from Netflix, and now the content producers also want either more money or to restrict access to new shows and movies. At the very least this poses the threat of a profit squeeze to Netflix, and at worst, threatens to choke off availability of new TV shows and movies to Netflix customers.
Both of Netflix’s antagonists are banking on squeezing the company’s profitability on the $8/month unlimited streaming service. If Netflix has to pay more for bandwidth and more for content (if it can get it), then it will have to get more customers or charge more or both. Getting more customers is costly or charging them more than $8/month when Amazon.com (NASDAQ: AMZN) is giving streaming movies away free with a $79 annual subscription to its Amazon Prime service could make Netflix profitability problematic.
To counter the production companies, Netflix recently announced that it would acquire first distribution rights to a new series directed by David Fincher and starring Kevin Spacey. This move was clearly a shot across the bow of the studios, but apparently they aren’t about to surrender to Netflix.
Before Netflix had 20 million subscribers, the studios and production companies were glad to have the additional revenue stream. Now that Netflix has crushed Blockbuster, the content providers want to make up that revenue either by squeezing Netflix for more money or by setting up their own streaming services and cutting Netflix out altogether.
A betting man might say that the content providers are destined to prevail in this struggle, but Netflix has some very strong cards to play. One is expansion outside North America. The company’s ability to expand its streaming business is probably unequaled by any of the content providers. Amazon, and potentially Facebook, could compete with Netflix globally, but Showtime or Starz need Netflix to get their shows out.
Netflix’s streaming business is cannibalizing its DVD rental business, and its $8/month unlimited streaming package is not generating enough profit to make up the losses. But that will change at some point as mailing and handling costs drop. As long as the company doesn’t have to pay enormous fees for bandwidth, this is a long-run positive for Netflix.
Netflix has just been too successful for its partners not to notice. They have to try to regain the revenues they’ve passed along to Netflix. The TV channels and movie studios don’t want to end up in the same position as the recorded music industry, where digital distribution has decimated revenues and profits.
Paul Ausick
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