Is Netflix Screwing Itself Over By Focusing on Streaming?

Since it was founded in 1997, Netflix has quickly risen to become one of the dominant providers of home video entertainment. After rendering Blockbuster’s business model woefully outdated, Netflix has made a big bet on streaming, partnering with hardware manufacturers to offer its digital distribution services over many platforms. You can now buy dozens of phones, Blu-Ray players, and video game consoles that stream Netflix movies, and that number grows every day.
Recently, Netflix made substantial changes to its pricing plans, introducing a streaming-only plan for $7.99, while jacking up the pricing of its DVD/Blu-Ray plans. The net effect of this will likely be to drive more people towards the streaming-only plan, while causing some attrition for its higher end plans. This makes sense in the short-run; after all, Netflix’s disc subscribers require Netflix to spend over half a billion dollars on postage per year and maintain costly distribution centers. But by focusing on streaming for the future, is Netflix screwing itself over?

Edward Epstein (author of The Hollywood Economist) has a post at The Wrap laying out the potential pitfalls with this plan. The crux of the issue is that digital streaming is an entirely different market than DVD rentals, primarily due to legal reasons. With DVDs, the “first sale doctrine” allows Netflix to purchase a DVD and rent it out to anyone without getting the permission of the copyright holder. Obviously, licensing digital content is a whole different animal:

In the case of new movies, studios license slates of 20 or so titles in so-called output deals for hundreds of millions of dollars. The average cost for a single title in such a deal is about $16 million for a two-year license. Where Netflix can buy 10,000 copies of a major title for $150,000 to mail out, it will need to spend about $16 million to license it for streaming. Such a hundredfold increase in price can obviously be deleterious to profits especially since Netflix still has to maintain its mailing centers, and buy DVDs, for the subscribers who elect to continuing using the mail-in service either because they prefer DVDs’ higher quality and features or they don’t have the apparatus to receive digital streaming.

Netflix recently made a deal with Epix to get rights to films by Paramount, Lionsgate and MGM. That deal is said to cost about $900 million over the course of five years, not cheap by any measure and maybe not as good a value as buying DVDs (although of course, the eventual saved costs on distribution and postage may make this profitable). Moreover, Netflix recently offered to pay between $70,000 to $100,000 per episode to stream current episodes of hit primtime shows.

Many of Netflix current content deals — deals that have made Netflix Watch Instantly such an appealing option for many subscribers — were cut during a time when people had no idea what the hell digital streaming was or how to value it. This is why we can get Starz movies and episodes of The Office on Netflix; Netflix cut a backdoor deal with Starz for the streaming rights to its content, and its content deals for TV shows happened before properties such as Hulu or ABC.com were as big as they are today. When these deals come up for renewal in 2012, you can bet that the price for this content is going to be much more onerous for Netflix.

In addition, Netflix faces increasing competition from a variety of sources. HBO is launching its own portal, HBO GO, which will allow HBO subscribers to stream HBO movies and original series. Meanwhile, Amazon is launching a Netflix competitor, and the new video games service OnLive may soon offer movies to subscribers. Time Warner CEO Jeff Bewkes (who, to be fair, has a horse in this race; Warner Bros. is an investor in OnLive) recently declared that Netflix hasn’t shown it can compete seriously in the content distribution space.

Netflix CEO Reed Hastings strikes me as a monstrously intelligent guy; I’m sure Netflix has run financial models and done a great deal to predict what will happen if Netflix’s future is streaming-only. But with the world of content delivery in such upheaval these days, and movie studios loathe to cede power to Netflix the way the music industry ceded power to Apple, Netflix may face a more difficult road ahead than its current profits and growth would indicate.

Walmart Buying Vudu Online Movie Service

Online movie and TV service VUDU, the Santa Clara, CA-based digital provider,  has been acquired by Walmart, the retail giant announced today.

VUDU’s technology, which delivers access to movies and TV shows directly through television, allows customers with broadband access and an Internet ready or Blu-ray player to purchase movies without using a computer or cable/satellite service. An article in The New York Times today valued the deal at $100 million and indicated that the two entities have begun informing studios and television manufacturers.

NYT also reports that the integration could also give Walmart the chance to one day sell various products via people’s televisions through VUDU’s technology.

VUDU has licensing agreements with major movie studios in addition to what Walmart calls “dozens of independent and international distributors” that offers some 16,000 movies. Walmart is already the largest seller of DVDs in the U.S.

“The real winner here is the customer,” said Eduardo Castro-Wright, vice chairman for Walmart in a statement. “Combining VUDU’s unique digital technology and service with Walmart’s retail expertise and scale will provide customers with unprecedented access to home entertainment options as they migrate to a digital environment.”

“We are excited about the opportunity to take our company’s vision to the next level,” said Edward Lichty, VUDU executive vice president in a statement. “VUDU’s services and Apps platform will give Walmart a powerful new vehicle to offer customers the content they want in a way that expands the frontier of quality, value and convenience.”

Online Video Advertising may soon match TV Advertising

The Present

At the present time, online video viewers are lucky. And I say that as one of them. Most video sites are free, with advertising (both text and video-based) paying the bills and ensuring we get to watch good content without having to pay.

What’s more, the advertising is nowhere near as intrusive or as frequent as it is on traditional television. There’s probably four times as much advertising on TV as there is on the Web, on average.
However, according to AdAge, that could soon be set to change.

The Future

Starting in September, Nielsen intends to unify its data collecting to include both TV and the Web. So the advertising attached to a particular show, whether it be online or off, will be noted. This may not seem important to us, the end consumers, but from February next year it will be.

That is when the data is expected to begin being used for advertising negotiations. And to make the data accurate for this purpose, shows broadcast online would have to show the same ads as when they’re shown on TV. Which will mean a significant ramping up of advertising against online video.

TV Vs. The Web

This is all part of the convergence which is happening between traditional TV and Web TV. More and more consumer electronics are Internet-enabled, and that means people have multiple options for watching TV other than the box in the corner.

Time Warner and Comcast’s ‘TV Everywhere’ is a reaction to that, giving consumers more viewing options while still retaining the ability to squeeze cable subscriptions out of people’s pockets. As TV andonline video meld into one, more advertising is almost guaranteed.

Keeping It Free

That’s not necessarily a bad thing, as advertising is the only way content is going to be made available for free in the future. There are only two options for media companies seeking to make a mint from the Web: a subscription paywall or enough advertising to keep the content free. And I know which one I, and the majority of other people, would choose.

Conclusions

So I say increase the amount of advertising. So long as it coincides with a commitment to keeping the sites free and an increase in the amount of premium content which Web TV viewers are crying out for.

Viable Online Distribution of Indie Films

A growing problem for Indie Film Makers is distribution. While reputable Indie Film Makers have it easier than amateurs (though not buy much) when it comes to attaining distribution, the entire concept of distribution is almost redefined every month. The ideal placement that most Film Makers aspire to is Theatrical, and to a lesser extent, DVD. The most widely used form of distribution today is the online world, sites like Youtube, iFIlm, and various other "user" based sites, all free, which hardly, if ever, provide a financial yield to the Film Makers. Recently, however, that has changed with Gigantic Releasing, an online website where Indie Film Makers have the chance to post their films.

Mark Lipsky, Gigantic's president stated: "The picture quality is far superior to most other streaming sites today, the ticket price is utterly affordable, and there will be absolutely no advertising to get in the way of the film-going experience. Gigantic is introducing a sweeping change to the way movies are distributed, and this is just the first step." adding "Unlike other emerging sites, we are not simply ad salesmen aggregating content nor are we repurposing old content. We're an actual film distribution company doing what distributors have always done. We seek out and acquire titles that we believe will be viable in the marketplace, we work tirelessly to market and promote those films and now, by enabling first-run national access, we will be dramatically expanding the market as well as reinvigorating the existing audience for independent fare."

The price for each film is $2.99 for unlimited 3-day online access. Gigantic also offers free content from the company's existing database of work.

This is an extremely wonderful new way for film makers of all kinds to gain the credibility and exposure they seek. If you're like me, you may find watching a film on your computer a little uncomfortable, but with the new stream rates and such compu/tv breakthroughs such as AppleTV or even an S Video cable, you can send the image to your television to enjoy a more "cinematic" experience. Gigantic is a company that we should all be watching closely, because they may very well be the future of distribution, and at the very lease; a part of it.