The catalyst for this came from the announcement by Netflix CEO Reed Hastings that the company is willing to pay up to $100,000 per episode for “in season” series. This caught the ire of Time Warner chief Jeff Bewkes, who immediately came out swinging in a patronizing public offensive — admonishing Netflix to go back to their snail mail sandbox and not bother competing with the big boys. In addition, a slew of articles from this week cast a skeptical light on the company’s business model and future as a competitive streaming operation. Two in particular are worth noting.
The first post came from Andrew Wallenstein at PaidContent, who started off by dismissing the New York Post report that gave too much credence to the announcement. Andrew correctly points out that in the episodic business, Netflix will find it greatest success with serialized shows like Mad Men, which can’t be watched a la carte like Law & Order and therefore earn less money in the syndication market.
If Netflix scooped up serials, it could actually find itself in the position to be something of a saving grace to the TV industry that too often gets burned gambling on these shows only to make nothing on the back-end. Fortunately for Netflix, on-demand consumption actually lends itself to serialized episodes and the number of episodes is irrelevant.
The second article came from author Jay Epstein, TheHollywoodEconomist, whose article Is Netflix Streaming Towards Disaster rightfully questions the sanity of Netflix’s rapid transition from a DVD-by-mail company to a streaming-centric operation.
Jay raises the point that (in addition to their business method patents) Netflix’s secret sauce for dominating the DVD mail order business has centered around the “first sale doctrine”, which states that once a person buys a DVD, they can rent it out to others without the permission of the copyright holder. Unfortunately, this doctrine does not apply to streaming, which means if Netfix wants the new releases that they’re accustomed to getting with DVDs, they’re going to have to pony up a lot more than the $150,000 they’re used to paying for 10,000 DVD.
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.
Netflix is obviously motivated to find a way to curtail their $450 million postage costs for the two million DVDs that are shipped each day from their 50 distribution centers. And the educated press (and Mr. Bewkes) are justified in questioning the company’s ability to become a premiere streamer of premium in-season television programming and new studio releases, all for $9.99 per month. That math doesn’t work, and Time Warner wants everybody to know it, and to keep it that way. Netflix was undoubtedly aware of this prior to the announcement and didn’t need Bewkes to spell it out; perhaps they’re dangling a bright-shine-object for the media to focus on while they go about doing what they always do, which is innovating and getting the jump on everybody else.
I still stand behind my prediction from October, that Netflix will soon produce original content, or become an active (and much needed) domestic licensor of independently produced television series, like Stephen Segal’s Southern Justice (which Voltage Pictures financed almost entirely from foreign presales) and Dean Devlin’s Leverage (which is financed by a license from TNT and foreign presales, also sold by Voltage.) Both series are successful, albeit at very different price points, and a library of similar series would extend Netflix’s library valuation well beyond its current three year life cycle. I’m not going to bet against Netflix or Hastings, and look forward to seeing how this plays out.