Was the Starz/Netflix Deal a Self-Inflicted Wound?

As previously noted on this blog, Netflix is transitioning its business from physical DVDs (arriving in distinctive red envelopes via snail mail) to streaming. A key transaction, that allowed Netflix to pursue a strategy of offering motion picture content via the Internet, was the deal Netflix founder Reed Hastings and his Chief Content Officer, Ted Sarandos, struck with cable provider Starz.

Sarandos and Hastings knew that Starz, in obtaining the cable TV rights to recent Disney and Sony films, had also licensed the Internet streaming rights to those films. In other words, the digital delivery rights that Starz had licensed from these two big studios could be split up into cable TV and Internet streaming. But Starz didn't have their own platform for Internet streaming. So, even though they held some potentially valuable rights, Starz couldn't monetize them. That's where Netflix stepped in.

Seeing a multimillion dollar offer from Netflix as found money, Starz quickly sold the Internet streaming rights it held for around $30 million per year. That deal (including streaming rights to recent Sony and Disney films), became the centerpiece of the Netflix transition to online provider - allowing subscribers who were already getting physical DVDs to begin sampling online delivery from a slew of recent big studio films.

Some cable industry insiders now see the deal that Starz made with Netflix as an enormous blunder. In their view cable providers should not be helping Netflix to undermine the cable TV subscription model. And they think Starz hurt the entire cable industry by encouraging "cable-cutters" (customers who decide they can receive their motion picture content from the Internet at a lower cost and are therefore cancelling their cable TV contracts).

The Starz/Netflix deal is set to expire in October 2011. And,
according to this December 12th, 2010 report in the NY Times, some industry insiders (like Time Warner's Jeff Bewkes) predict that Netflix will never again be able to make a similar deal. Bewkes (and others who work for the big conglomerates) are predicting that the economic balance between Netflix and content creators will tilt back toward the media conglomerates.

Netflix may never again snap up feature film rights at such a bargain - but the momentum toward convergence (where motion picture content is available on all platforms) seems undeniable. Even as the head of Time Warner refers to the current Netflix deals as an experiment that is coming to an end, he and the heads of other conglomerates are still making deals there (Netflix has recently added to its TV content library, signing new deals with Time Warner for "Nip/Tuck" and with Universal-NBC and Disney-ABC for other current TV content). That's because, despite what Jeff Bewkes says, the big content creators need to reach their customers - and Netflix has managed something none of the studios have yet done for themselves, building a ubiquitous platform for capturing online revenue.

Here's a short video - posted to YouTube in early 2010 - where Ted Sarandos of Netflix suggests that Netflix sees the transition from physical DVDs to streaming happening in a slow and orderly way (back then, Sarandos seemed intent on reassuring Netflix DVD customers - and the big studios? - that the transition away from DVDs would happen slowly... I wonder what he would say today?):