Netflix will be recast from ally to villain

December 22, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Netflix will be recast in the role of the bad guy next year. The video-streaming service was once derided as the “Albanian army” by Time Warner boss Jeff Bewkes, but now is worth roughly the same $55 billion as his company. With some 69 million subscribers worldwide, it may be too late for media bosses to do much about this beast they helped create.

It wasn’t long ago when TV and movie producers considered Netflix something of a hero. The company became a new buyer of programming. Now, however, the increasing popularity of Netflix is contributing to the erosion of pay TV, the more lucrative and predictable source of revenue. Consumers are starting to ditch expensive cable bills in favor of à la carte options like Netflix. By 2020, SNL Kagan forecasts that 82 percent of U.S. households will be pay-TV subscribers, down from a peak of 88 percent in 2011.

That’s one reason why Bewkes, Twenty-First Century Fox Chief Executive James Murdoch and Walt Disney boss Bob Iger are signaling a change of heart. Murdoch, for instance, said that Fox is going to do more business with Hulu, the Netflix rival jointly owned by Fox, Comcast and Disney. Those decisions may cause other problems. The producers of hit series “Homeland” on CBS-owned Showtime, for example, are concerned they’re getting a smaller cut of profit because of deals struck with Hulu, according to the Wall Street Journal.

The industry’s wariness may be futile at this point anyway. For one, Netflix’s coffers have grown too big. Its increasing scale should enable it to outspend rival networks in 2016. Though in programming Netflix is still catching up to the likes of HBO, which recently signed up “Sesame Street” and Jon Stewart, Morgan Stanley estimates the company led by Reed Hastings will splash out some $2.5 billion next year in the United States, compared to HBO’s $1.8 billion and Showtime’s $700 million.

Netflix is also scaling up production of original shows like “Master of None” and “House of Cards.” That gave it the confidence earlier this year to opt out of renewing a programming deal with Epix, the venture owned by Viacom’s Paramount Pictures, MGM and Lions Gate, because it couldn’t secure exclusivity. That’s a pretty strong show of force by what was once considered an insignificant military operation.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.

4 comments

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If Netflix keeps “scaling up” shows like Master Of None, they won’t be a player for long. What an awful show.

Posted by BillSimmons | Report as abusive

There have been numerous financial reports on the thin profit margins delivered by Netflix. The Kagan forecast referred to in this piece showing a very modest 6% loss in traditional pay tv subs by 2020 doesn’t bode well for Netflix in the terms of additional growth.

The reason Netflix is spending huge amounts from their thin profit margins on original programming relates to the fact the legacy networks still dominate the original programming market. This along with the long term contracts the networks hold with the NFL will keep the traditional pay tv model around at least till 2022. If someone told me I would have an 82% market share six years from now I would be very happy!

Posted by wsmviking | Report as abusive

Netflix had been the friend to fidelity conscious viewers. They delivered picture quality superior to HFC and Satellite. Alas, they appear to be abandoning quality with their recent announcement that they will re-encode their entire catalog at lower data rates. Consumers spend thousands on big TV sets, but no one will sell us high bit rate (high image fidelity) premium content worthy of viewing on our big screens.

Posted by R.M.E. | Report as abusive

Netflix was really good for many years with their wide array of excellent programming especially series like Masterpiece Theater, Longmire, the Swedish Wallander, and many others but of late they have rushed into the race embracing quantity in place of quality. In addition they have a poor selection of movies we have not already seen, but at least they are commercial free for $8/month. As an ad-free resource if is unbeatable. HULU on the other hand is a Netflix wanna be happy to charge you the same price for basically a network broadcast station model chock full of useless commercials and with limited programming and they they have the nerve to charge an extra $5 for commercial fee viewing. No sale.

Posted by Vargaz | Report as abusive