The future of Netflix is in the hands of the studios (UPDATED)
100 million U.S. households have pay TV (inclusive of cable, satellite, and FiOS). 14 million households have Netflix subscriptions. If consumers move away from the current method of buy-in-bulk (i.e., pay for 500 channels even if you only watch six of them) and transition to an a la carte model (and an on-demand one), Netflix is one of many companies poised to take over market share from the cable companies (which, it’s worth noting, are also ISPs). However, in order to rent movies digitally Netflix needs one thing they haven’t needed in order to rent DVDs: permission from the studios.
The graphic above shows Netflix believes their DVD-by-mail rentals will peak in 2013 and then trail off as more and more customers stream movies through set-top boxes and other connected devices.1 The graphic below shows how Netflix plans on expanding their service in a post-postal service world.
Netflix spent $1.4 billion last year on shipping and handling. As they transition away from rental-by-mail and move progressively towards streaming, the money they save on shipping can be spent on licensing films from studios. Which is a good thing, because to rent DVDs through the mail Netflix simply buys as many DVDs as they want, and the studios can’t do anything about it; this is because of the First Sale Doctrine, which states that a purchaser of a copyrighted work can do whatever they want with their copy so long as they don’t duplicate it. When they’re mailing DVDs all across America, Netflix doesn’t need permission from any of the studios. When they’re streaming movies digitally, however, they need legal and revenue sharing agreements, and this places their fate in the hands of the studios.
If a studio decides that pay-per-play is the way to go and that subscription streaming services cheapen their product, there won’t be much Netflix can do. On the other hand, if the present state of the music industry is at all indicative of the future of the film industry, music studios are not pulling content from subscription-based streaming services like Rhapsody, which would seem to offer some indication that Netflix will have continued access to studio films (even if there’s now a 28-day window). However, movies and music are fundamentally different media; people listen to songs over and over again, but very few people watch the same film over and over again. If you’re going to experience something repeatedly it makes sense to buy it; if you’re only going to experience it once it makes sense to stream it. In an economy where streaming is cheap and ownership more expensive, films run the risk of always being streamed. So while I’m a big believer in all-digital delivery, the looming specter of streaming poses questions not only for Netflix but for content creators as well.
UPDATE: The entire presentation by Netflix CEO Reed Hastings is now available online. It’s a great quick read; I think slide 33 (about $100 CPM) is very interesting, as ads get more and more targeted (using techniques like real-time marketing):
- Wait, people will still rent movies through the mail in 2029? [↩]