- Build It (20m Subscribers) and They (Content Producers) Will Come
- If This Deal Fails, Another Will Succeed
When you’re in more homes than any pay-TV service except Comcast but the studios and TV networks won’t give you their latest and greatest shows to stream, what do you do?
The answer is in the numbers. You go out and get your own content, of course.
Netflix is in advanced talks to commission a TV-like 26 episode series that would star Kevin Spacey and be directed by David Fincher, who directed ”The Social Network,” according to numerous sources that cited people familiar with the talks.
| Pay-TV Service | Basic Video Subscribers |
Comcast | 22,937,000 |
| Netflix* | 20,000,000 plus |
| DirecTV | 18,934,000 |
| Dish | 14,289,000 |
| Time Warner Cable | 12,551,000 |
| Cox | 4,968,000 |
| Charter | 4,653,000 |
| Verizon | 3,290,000 |
| Cablevision | 3,043,000 |
| AT&T | 2,739,000 |
| Source: NTCA * Source: Netflix as of December 31, 2010 | |
Netflix expects 21.9 to 22.8 million by March 30, 2011.
It has seemed inevitable for some time and often predicted here that online services like Netflix would start producing their own shows, particularly if the studios and TV networks kept their best stuff away.
It’s a way for Netflix to get traction in its efforts to get content from the studios and TV networks.
It’s also a way for Netflix to enter the European and Pacific Rim countries without having to worry about the legal entanglements of the major content producers.
We predict that if this deal doesn’t come through, then Netflix will keep trying to get its own content. How many old TV shows and movies can a Netflix subscriber watch? And the major content producers and pay-TV services know that there is a limit as to how much TV a consumer can watch. When they’re watching Netflix they are not seeing the ads that keep the industry afloat. For that reason, Netflix becomes even more of a direct threat to the pay-TV companies.
And if Netflix (or someone else like Amazon/LoveFilm) can get its own content produced with major actors and directors, then it can also buy the rights to sporting events and operate its own news channel.
It is not known whether Netflix will offer its own content as pay-per-view, for an extra monthly fee or for free. It doesn’t matter initially because other than setting a precedent to be broken, Netflix can change the policy down the road. Netflix could also sell distribution rights to its content to TV networks and TV distributors outside the States just as the majors do.
The current deal involves producing a miniseries called ”House of Cards,” a UK political thriller. In 1990 the BBC made a highly regarded four-part miniseries of it starring Ian Richardson that is based on a novel of same name.
Producing original series such as ”The Sopranos” and ”True Blood” has become a way for pay-TV networks like HBO to attract subscribers. Time Warner’s HBO then sells distribution rights to the series to ”free” pay-TV networks after it has aired them several times.
It’s not known how much Netflix will pay for the series, which will reportedly have 26 episodes, but some estimates have said it could be as much as $100 million. Netflix knows exactly what will interest its subscibers because it continually monitors what they watch.
Spacey’s spokeswoman Staci Wolfe subsequently confirmed the talks, but Fincher and the purported production company Media Rights Capital II LP aren’t talking yet. The Wall Street Journal reported that under the terms being negotiated, Netflix gets the online distribution rights, but Media Rights Capital would be able to make other deals for broadcasts and DVDs later on.
Netflix has the money and a paying subscriber base. Its 2010 fourth quarter revenues were $596 million, and its net income was $47 million. Amazingly it added 3.08 million subscribers during the quarter.
Netflix dominates the smart TV market. Every smart TV, every Blu-ray player and every smart TV adapter, including Apple TV and gaming consoles, come with Netflix as a widget. Some CE makers such as Samsung, Sony, Toshiba, Roku, and Boxee are going to produce TV remotes that have a red button for single click access to Netflix.
Netflix knows that streaming is its future. Its Canadian operation only offers streaming; it offers no option for delivering DVDs through the mail. It wants more and better content to stream.
It has made two significant deals lately:
- Netflix will pay about $1 billion over five years for movies and TV shows to Epix, a pay-TV/online channel that Viacom (which owns Paramount Pictures), Lions Gate Entertainment and MGM own. Epix is also making deals with pay-TV companies that let them offer shows on an Epix channel and online to the same subscribers.
- A deal with ABC/Disney that includes all previous seasons of ”Lost,” ”Desperate Housewives,” and ”Brothers and Sisters” from ABC and ”Phineas and Ferb,” ”Good Luck Charlie” and other shows and original movies from the Disney Channel.
It also has a deal with Liberty Media’s Starz that expires in mid-2012. Both companies say there’s lots of time left for negotiations.
With the move to produce its own content, Netflix will move from being a distributor of shows like pay-TV services to a producer like CBS, Showtime and HBO.
This week NPD Group reported that 61% of all movies watched online for the first two months of 2011 were accessed through Netflix. Included in the NPD analysis were streaming movies over the Internet, Apple iTunes and pay-TV’s VoD services. Comcast was a distant second at 8%. DirecTV, Time Warner Cable and Apple were tied for third place with 4% each.
Netflix’ competitors in online streaming are not close in number of shows available or in subscribers. Amazon has the potential to be its major competitor. Its LoveFilm gives it both streaming and DVD rental by mail in most of Europe. Amazon offers only about 5,000 movies and TV shows in the US; Netflix has more than 20,000.
Amazon’s online service is included in its $79 a year Amazon Prime service that gives customers unlimited two-day shipping on purchases.
Goldman Sachs analyst Ingrid Chung said this week that the percentage of US consumers who stream television shows and movies is growing rapidly — to 27% this year from 16%. She said the growth is due to the spread of devices like the iPad and iPad2. Netflix has said that it now streams more to Apple TV owners than to iPads.
Chung said Netflix is large enough to make it difficult for competitors to enter the market and even if they do, there’s plenty of room for growth. ”We believe that the demand for video streaming could be big enough to sustain multiple business models and competitors and that these models can co-exist,” she said.
Especially if Netflix starts adding ”must see” shows that it gets first.
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