Netflix is Losing the Content Wars
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“You've never seen Party Down? You've gotta watch it! Both seasons are on Netflix,” I told a friend. But they weren't. Even though I had just watched the series on Netflix a couple months ago, it was nowhere to be found. And this epitomizes the problem Netflix (NASDAQ: NFLX) faces.
My friend couldn't watch Party Down because the Starz network, which owns the show, had pulled it, along with 1,000 other TV series and movies after negotiations had broken down to renew the five year, $30 million contract. Netflix CEO Reed Hastings had previously stated that Netflix would pay $200 million a year for a new contract, but even for almost seven times their original fee, Starz still felt it had better options elsewhere.
This illustrates a critical shift in Netflix's competitive landscape. Initially, the company's highly efficient nationwide distribution network for DVDs gave Netflix an impressive moat. It would have taken big investments in logistics to match Netflix's ability to get a DVD from your queue into your mailbox in just a day. With the mass adoption of video-on-demand streaming services, however, Netflix is finding that competitors are easily able to copy its business model.
In some ways Netflix is a victim of its own success. Its rapid growth disrupted the industry, startling long-sleeping cable giants into investing in their own streaming services, and attracting the attention of tech giants new to the space. The result, as we see in the Starz decision to walk away from the Netflix deal, is that content owners now have their choice of distribution partners, strengthening their pricing power. As technology advances in video-on-demand services, streaming will become an undifferentiated product: watching a video will be the same whether it is being streamed by Netflix or a competitor. That means the battle for viewers' TV time will be waged on content: whoever has the movies and TV series that viewers most want to see will be able to attract more subscribers and charge more for their services.
Content is Key
There are two ways to get content: you can make it or you can buy it. Several companies have the advantage here, and Netflix isn't one of them. First, both making and buying content is expensive and getting more so, and Netflix has a lot less money to spend than its competitors:
Companies that both make and distribute sought-after shows and movies are in the best position. Time Warner (NYSE: TWX) has been trying to better monetize its highly valuable HBO properties by introducing the HBO GO streaming service to allow customers to watch anywhere, any time, showing that even the moribund cable providers will defend their turf. Comcast (NASDAQ: CMCSA) has been even more aggressive, acquiring NBC studios and investing heavily in its On Demand service.
Amazon (NASDAQ: AMZN) is leveraging its strength in retail sales by offering its video service for free with a subscription to Amazon Prime, which also provides free two-day shipping, access to the Kindle Lending Library, and other perks for only $79 a year. While Amazon may suffer in getting new releases, its library of movies and shows for sale give it many avenues for growth in a streaming environment. Amazon also recently announced that their video application would become a part of the Xbox platform, gaining access to an audience of over 40 million.
Apple (NASDAQ: AAPL), though a latecomer to the space, has so much money on hand that it could quite easily buy whatever movies, shows, or even studios, that it chooses. With the introduction of Apple HD and the television-sized iPanel, Apple may invest in its iTunes service as a direct competitor to Netflix.
The studios aren't sitting on their hands, either. The dark horse to win the battle for the living room is privately held Hulu, a joint venture between ABC, NBC, and Fox. Hulu shows new episodes of popular series the day after broadcast, and collects revenue from both subscriptions and advertising. Hulu has also been aggressive in creating its own original content, as well as licensing cult-following British shows and promoting them to targeted audiences. With the major studios supporting Hulu's success, the venture is likely to continue to enjoy access to premium programming at favorable prices.
And Netflix? Its only original series, Lilyhammer, was definitely popular in Norway. . . but wasn't actually broadcast on Netflix there. The company plans to continue pursuing new original shows, but it is well behind its peers in its ability to either produce new content or afford to buy it. Ultimately, the choice and flexibility offered by streaming video will expand the market, and there will be more than one winner here. But will Netflix be one of them? Not if it keeps losing the content wars.
Daniel Ferry owns shares of Amazon.com and Apple, Inc. He has previously both owned, and later sold short, shares of Netflix (sorry, old friend), and now holds no position. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.