The problem with Netflix

By Felix Salmon
April 24, 2012
Nick Thompson today asks whether Netflix is doomed, and gives a fantastic potted history of how the company managed to pivot from being a wonderful DVD-by-mail company to being a clumsy digital-platform play.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Nick Thompson today asks whether Netflix is doomed, and gives a fantastic potted history of how the company managed to pivot from being a wonderful DVD-by-mail company to being a clumsy digital-platform play.

While I agree with Nick’s conclusion, however, that Netflix is in a very tough spot, I disagree with the way he gets there:

It’s not easy for a startup to build massive warehouses and systems for mailing discs. It is easy, however, to get into the streaming business. Yesterday, for example, we learned of a startup called NimbleTV, which plans to let you watch all the channels you subscribe to through your cable provider on your phone or your tablet…

Netflix fears that just distributing digital content is a mug’s game. Anyone can move bits around, which means that the price for doing so will just keep dropping. So it’s trying to create its own original content. But, so far at least, it’s not very good at doing so. “Lilyhammer,” a mobster show that Netflix introduced in January, has gotten killed by reviewers; I gave up on the first episode after fifteen minutes of mediocre acting and clumsy dialogue. Early next year, Netflix will release a new season of “Arrested Development,” which will surely be better. But the company is in an odd spot, facing the same competition problem it avoided when it spun off Roku. If its shows are bad, it’s embarrassing. If they’re good, they could irritate partners. Netflix needs content from AMC, for example. But will those negotiations get harder once Netflix is creating its own shows to compete with “Breaking Bad” and “Mad Men”? …

It won’t be easy for Netflix to find a way to fend off its new competitors while keeping its old partners happy.

The way I see it, Thompson has this backwards. I think he’s dead wrong about the barriers to entry in the streaming business: they’re high, and if I were Netflix I really wouldn’t be worried about other streaming companies right now. As far as I can tell, Netflix is the only company in the world which is great at persuading millions of people to pay a regularly monthly fee for streaming content online. And while it might have competition on that front in the future, right now that’s the least of its worries.

Rather, Netflix’s problem is with what Thompson calls its “old partners”. There is a stream of money coming from Netflix’s subscribers, and Netflix is competing with its “partners” for that money. The studios have learned that Netflix will pay astonishing sums for streaming rights — orders of magnitude more than it ever paid for DVDs. And while Netflix used to be able to rent out a DVD hundreds of times after buying it once, under the streaming contracts it has to pay the studios every time a movie or TV show is streamed.

This is why I’m fundamentally pessimistic when it comes to Netflix’s prospects: any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears. Netflix needs the studios more than the studios need Netflix: no one’s going to subscribe to Netflix for Lilyhammer and Arrested Development alone. And while HBO has managed to build up a good business by producing original content, Netflix really doesn’t want to be HBO, it wants to be much bigger than that. It wants to be a one-stop shop for video content, rather than a single channel among hundreds.

The problem is that if you’re a one-stop shop, then you have limited negotiating power to tell any given studio that you won’t pay their price. Netflix’s subscribers are, ultimately, paying for the content, not for the pipe. And so it stands to reason that Netflix’s revenue stream will go the people making the content rather than to Netflix itself.

24 comments

Comments are closed.