Netflix and Others Should Brace for Changes in 2011

A major shift is taking place. The interwebs are now important enough for major content providers to start throwing their weight around online. Sure, they’ve been doing it to some extent over the last several years – networks keeping content off Hulu, broadcasters blocking video scrapers like RedLasso – but the studios are upping their game. The latest evidence is a report from Reuters that “senior executives at three of the big six television and movie studios” are looking to renegotiate their deals with Netflix. You know those 28-day DVD release windows before Netflix gets access to certain movies? The studios are looking at extending them further. And the money Netflix pays for digital rights to studio content? Increases are likely on the way. (Of course Netflix may be very willing to pay. There’s one report out that the streaming company would pay up to $100K per episode if it could get its hands on current TV line-ups.)

None of this is surprising. Just look at the retransmission wars taking place between TV networks and cable providers. As Netflix moves closer to that latter category, the company is going to start getting similar treatment. It’s just a distribution channel after all. And now that it’s a highly profitable one, the content companies are going to shorten their leashes.

There are other recent examples of networks putting pressure on digital distribution too. The limitations placed on the likes of Google TV and Boxee Box count as one example, but I also listened in at an industry event yesterday where it became clear that networks want to increase the ad loads for content online. Will Richmond of VideoNuze hosted the event with execs from MTV Networks, Comcast, and elsewhere, and one of the discussions centered on how much advertising consumers will tolerate online. The prevailing view seems to be that there’s still a lot of room for ad growth.

Don’t get me wrong – I do believe content producers and providers have a right to get paid for their work, and high-value content isn’t cheap to make. As a consumer, though, I can only sigh with resignation as I watch the online distribution channel evolve along the lines of traditional television, and hope that greed doesn’t push the pendulum too far.

19 thoughts on “Netflix and Others Should Brace for Changes in 2011”

  1. Mari,

    Would you rather pay a subscription or watch ads? As you stated, content owners need to be compensated so someone has to pay. I agree that a full broadcast load of 8mins of advertising for 22 mins of content it too onerous online, but still believe ad supported models will prevail in the end.

    Personally, I think CPMs will rise with online video vs. broadcast due to better metrics and ability to justify increased spend. This could keep ad volumes down while still funding good quality content creation. — T

  2. From the article about Netflix negotiating with the content co’s:

    “In today’s terms, Netflix pays Starz less than 15 cents per month for each of its … subscribers, while TV operators pay Starz $2 per subscriber per month”

    The Starz deal would be higher if re-negotiated today, but not that much higher.

    TV Operators are getting Starz at 1080 HD. Netflix is getting Starz at something close to 480, albeit cropped to 16:9.

    Nobody seems to have noticed this yet. As Netflix continues to take off, won’t folks eventually start talking about this? I’d say that SD fetching 20 cents on the dollar of HD is about the correct pricing ratio…

  3. “TV Operators are getting Starz at 1080 HD. Netflix is getting Starz at something close to 480, albeit cropped to 16:9.”

    Actually this is the #1 complaint I hear about Netflix streaming.

  4. Chucky, the resolution matters to you and I. But I wonder if the various owners and guilds care about such matters – it could be the content is the content. Then again, if that were so, we wouldn’t be stuck with SD Starz. Hm.

    Teaton, different services will handle it different ways. At some point the licensing costs may settle down and be universal. But how the likes of Hulu and Netflix recoup (and profit) is up to them.

    And while I’m at it, I’m still slightly annoyed by the Hulu Plus UI clipping via Roku. Someone (Hulu or Roku) needs to provide some overscan controls.

  5. It’s things like this that reaffirm my belief that the studios still do not understand their customers. There need to be low cost AND hassle free alternatives to pirating material otherwise pirating (while legally and morally wrong) will ALLWAYS win as a distribution model.

    There is no 28-day window. No message saying “This device is not supported for playback.” No TV seasons where episodes 3, 8, and 14 are not available.

  6. T- Depends on the content. But regarding CPMs, yes I agree. It’s just that the industry is in a painful transition period.

    Chuck- I think resolution does matter, but only to a point. I also assume Netflix will start looking at a higher-resolution offering.

    Charles- That’s only partly true. There’s certainly a window before movies make it to a network broadcast, and there’s always been a syndication window before reruns are allowed on secondary channels. That said, I agree with your point about the hit-or-miss nature of TV content online. From a consumer perspective, it’s ridiculous.

  7. I don’t really care about Netflix resolution. I want to be entertained. As long as the picture is watchable, audio is good and streaming is not interrupted I’m good. I think more people are in my camp than the videophile camp.

  8. I’m with Richard. While I technically like 1080p Blu-Rays / etc. I’m watching the movie, not the resolution. DVDs work for me. Streaming is acceptable, too, in that I’m still watching the movie/TV Show.

    I really don’t think content providers get it. They assume each of us will pay whatever it takes to get their glorious entertainment into our living rooms locked down however they like.

    What they don’t get: We don’t want to steal from them but we do want DRM free content that’ll play anywhere. We don’t differentiate watching on our TV via Roku or on our iPhone with Hulu. Why do they? We don’t see the value in $80-100/month for regular (no premiums) cable.

    Everything being equal, if regular cable were reasonably priced (under $50 and that not being some special deal or contract and that includes the box, HD, DVR) I’d just sign back up with cable. Streaming is kind of a stupid hassle. I’d even through them $5 every so often for some HD OnDemand flick. Their prices are just out of whack with most consumers and it’s just getting worse and, I believe, we’re at the cusp of cord cutters becoming common because of it.

    The same thing happened to land-line phone service. Had my land line phone service included everything a cell phone plan included but at a more reasonable rate (like phone service, voice mail, caller ID, etc – all the things we just expect from our cellphones now but have always been, and I assume still are, extras – even freaking DTMF is still an extra (or was when I dropped phone service) like $25/mo – I probably would have just stayed with them. No. It was $60+ before all of the ridiculous taxes and fees.

    As a consumer you start looking at this stuff and think, “Ok, I’d be stupid not to jump ship..”

  9. “Would you rather pay a subscription or watch ads?”

    That’s just the point. I’d gladly take that choice, but the powers-that-be don’t see that as an either/or conversation. They want BOTH. See Hulu plus as example. All your money is belong to us.

  10. “Chuck- I think resolution does matter, but only to a point. I also assume Netflix will start looking at a higher-resolution offering.”

    But Netflix can’t start looking at HD recent Hollywood movies.

    If Starz gets $2/month/subscriber for its HD library from the MSO’s, why wouldn’t they charge Netflix the same price for HD?

    And if Netflix pays $2/month/subscriber just to Starz, well, I assume you can do the math on the fun that would ensue.

    Netflix has made a choice to spend the large bulk of their budget on SD rights to as many mainstream Hollywood releases as it can get. There is no money left for Netflix to start looking at HD recent Hollywood movies.


    Netflix pays $.15 to Starz right now. If Starz is worth $2 to MSO’s, then by my gut feeling of SD being worth 1/5 what HD is worth as outlined above, Netflix ought to be paying Starz $.40.

    And as Leslie Nielsen would say, don’t call me Chuck.

  11. I often wonder if the studios realize that their onerous views have lead to the increase in piracy. I can tell you now that if it weren’t for Netflix, I would be torrenting non-stop. What companies like Netflix offer is decent quality entertainment and the piece of mind knowing that I won’t get hit with a lawsuit for trying to watch my favorite tv show/movie.

  12. Treaty – it’s not necessarily 100% up to the studios how these services monetize. Yeah, Hulu Plus hits you with a subscription and ads (as does basic cable). But Netflix has vowed to remain commercial-free. Vongo (RIP) was another all you can eat service (of movies, by Starz) – but it was ahead of its time, the market wasn’t ready.

  13. im shocked that anyone who reads this blogs doesnt care about resolution… netflix streaming looks like garbage and is unwatchable…

    i see no reason to take steps backwards to go forwards… HD streaming or disc by mail… fine with those… but don’t even try to tell me “we have x movies streaming instantly” when they all look like my dog chewed the vhs tape before it was played.

  14. I am with Chucky, Jon and Jim regarding resolution. While the content itself is important, video quality absolutely matters. While I can stand a limited amount of SD material, Starz content via Roku is generally terrible; most of it appears to be a poorer quality than other SD material.

  15. “I am with Chucky, Jon and Jim regarding resolution. While the content itself is important, video quality absolutely matters.”

    There are other reasons Netflix may be worth your lean-back money, at least some months out of the year.

    If you like indies and docs, (as I do), they’ve got a modest but nice curated HD library. And they’ve got a modest but nice library of recent TV telenovelas. And some, (like me), find it nice to watch some obscure back catalog stuff even in SD, just because it’s so normally inaccessible from the MSO’s.

    Netflix just sucks for most Hollywood theatrical releases, cuz they can only afford SD.

  16. Most of the folks I know with Netflix have tried Netflix streaming, and find it acceptable for 30 minute TV shows, but consider it unacceptable for “movies requiring attention.”

    I agree. As a longtime user of Blockbuster Online, I’m thrilled that I can get Blu-ray disks at the same price as DVDs. I appreciate the improved video and audio.

  17. I think the ad burden of online is going to have to go up. No it can’t go up to the level it is on TV, or at least I wouldn’t watch it if it did, since I don’t have a way to skip the ads online and am generally more engaged than when I’m ‘watching’ TV in lean back mode. But they clearly need online to be about as profitable as network TV, so the load is going to go up. Yes the ads should pay more so maybe we can justify slightly higher CPMs and keep the load lower as things settle out.

    Hulu keeps talking about how they’re looking at an ad-free alternative, but that it would be pretty expensive. Honestly I think all the people who complain about Hulu Plus not being ad free wouldn’t pay the $20-$30/month that Hulu Plus would want for their service if it were ad free, so I presume it’ll never come to pass.

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