Jeff Bewkes’ Empty Netflix Threats
Jeff Bewkes at Time Warner spouted some silly “threats” at Netflix this week, the latest sign that some content owners in the digital age forget who butters their bread. We saw this same thing happen in the music industry multiple times. Any time a distribution channel emerged that provided significant volume, the labels would start to sour on the power that channel exerted over them, largely on pricing, and try their best to cut their legs off. (Walmart, Amazon and Apple come to mind…) Now we are seeing it happen in the movie/TV industry. As I have discussed before, Netflix deftly navigated the treacherous pitfalls of digital video content licensing, building huge customer traction with their DVD business. This enabled them to be able to write big checks to studios to license their content. Now, it seems, as soon as the studios see Netflix’s consumers actually watching the shows, some are “threatening” to force Netflix to pay more for the content when the deals next come up for renegotiation.
These threats are likely pretty empty. Sure, Netflix expects to pay more for hit content over time. But they also expect to pay a lot less for non-hit content, and Netflix is great at surfacing the movies and TV shows we weren’t sure we wanted to see. In addition, Bewkes fails to anticipate that by the time his Netflix deals come up again for renewal, his core DVD business will be massively eroded and Netflix will be dominating on-demand viewing. This means that the cable companies who pay rates for on-demand viewing will offer less volume and economic potential than Netflix will. And who will need Netflix more than ever? Time Warner. I believe Netflix will hold the balance of power at the next negotiation, with more subscribers than the largest cable companies.
Let’s not forget that this animosity underserves Bewkes. Netflix represents the most customer-friendly way of watching movies today, period. Their 16M subs absolutely adore the service, and they aren’t going anywhere. Bewkes still views the world the old way, where studios could create movies and assume we’d watch them. We have more choice than ever and Bewkes needs customer-friendly distribution channels that keep sending money to him, even if the unit costs are lower.
David: I have to respectfully disagree a little bit with this commentary. Yes Netflix is popular – and their streaming service has been extremely well received, but they have generally gotten away with underpaying for content and building their business off of this lower priced content delivered on someone else’s infrastructure. This is not meant as a denigration of Netflix – on the contrary – they have been quicker, smarter and more willing to give consumers what they want.
However, they still have to deal with the cable companies for distribution and still have to deal with the studios for content.
I believe what Bewkes is seeing is a decline in his HBO business (remember he started there) and for the first time in its history, subs are down the past few quarters. I think the reasoning is that if I’ve missed a movie in the theater, and haven’t bothered to watch it on DVD or VOD – then whether it shows up 6-8 months after release on HBO or 9-12 months after release on Netflix is irrelevant to me. HBO wants to charge me $10 / month and Netflix is the same. From a movie standpoint the deal is a no brainer – it’s Netflix all the way – so as a subscriber you have to ask yourself whether the self produced content at HBO (Big Love, Entourage, Boardwalk Empire) is really worth the $10 / month – and increasingly the answer is no. I can wait another year and catch all of these shows on Netflix when the DVD’s come out!
Also, when you call up to cancel cable – the first move in the playbook is to get you to take a lower service level – i.e. cut off HBO. In times of trouble – they are quick to cut this service – which is probably their lowest margin video offering.
So I view Bewkes’ comments as more geared toward his desire to push through his TV Everywhere service – which would allow you as a subscriber to a multi channel video service to watch any content anywhere at any time and on any device.
I’ll end with an agreement – Netflix will continue to aggregate more and more power as its subscribers grow – but its costs will continue to spiral – to the point where they will eb charged on a per sub basis with the same prices that cable companies pay. If they are truly a replacement – then they will pay the replacement price.
The big risk for the studios is that they view Netflix as a windfall on top of the normal MSO business – as opposed to a substitute for them – an overbuilder of sorts. For a lot of reasons, I believe the cable companies will largely be protected from over the top (OTT) services – but the studios – if they don’t hang strong – will be facing a very formidable negotiator across the table from them.
As always, great comments, Harry. Two thoughts: Why do you say Netflix “got away” with “underpaying” for content? Underpaying compared to what? The old economics won’t survive pari passu as we transition to a fully digital on-demand IP-delivered world. There is no reason for them to stay the same, except for the content owners’ desire to keep them that way. The economic pressure on reducing content costs is real, and I think, unavoidable. Also, all of Netflix’s digital deals were voluntary negotiated deals. No one forced the content owners into them. Second point — Netflix pays to stream the content! They have enormous bandwidth costs. And the consumer pays to receive the content — they pay their ISP! This idea that Netflix is somehow using the internet for free is unsupported. Love your POV on HBO subs decline. Very real issue.
As an HBO subscriber, I just wanted to respond. Back in 2009, my family faced some financial uncertainty so I seriously considered dropping HBO. But then I realized that as an HBO subscriber I was given discounts on many of the fees the cable company would have normally charged me. Basically, in order for me to have saved real money I would have had to kill my DVR and go down to totally basic cable — looking at that option I figured I would just kill TV altogether. But then that would have hit my broadband and telephone charges which would have gone up. So my point is I don’t know if it is true that HBO has shed a lot of subscribers; I’m just saying it doesn’t really save all that money given the “bundling” deals. I chose to keep it and trim other monthly expenses instead.
David,
First off, I definitely appreciate your valuable insight; I just recently started following your work.
This Netflix chatter hits home for our start-up, which is working on audio streaming capabilities. I provide some commentary here: http://blog.audioanywhere.com.
Additionally, Bewkes’s sour grapes also provide a lucid example of outdated thought where the content providers think they should control or be the delivery channels. That’s neither efficient, economical or what consumers want. This phenomenon is further evidenced by the numerous mobile apps springing up for solely the NY Times, NPR, CNN, NFL, USA Today, BBC, FOX, WSJ, etc. I could go on and on.
From that, I think HBO’s new streaming service will strike out too. People don’t want to go through the content provider. They want a great aggregator of all the content–like Netflix.
Hegemonic conglomerates like Time Warner and their reluctance to adapt to these dynamic times is laughable. I completely agree that Netflix will be holding the cards come re-negotiation time.
Scott
Thanks for your comments, Scott.
David,
I agree somewhat with what you are saying but with the barrier to entry into this business I think Netflix’s best days are behind them. Yes they have a huge lead but we now have Facebook talking about getting into the game as well as Google. The number one and number two most trafficked sites in the world last time I looked. That might hurt just a wee bit don’t you think?
Thanks for your comments, Tray. The market for on-demand video is still quite small and early, so I think these new services (if, in fact, Google and FB launch them — it is still unclear they will) will largely be additive to the market and will not significantly impact NFLX. I wholeheartedly disagree NFLX’s best days are behind them. They are killing it right now.