Why Netflix (As We Know It) May Be Doomed and All The "Film Is Dead" Lamentation Misses An Essential (and Hopeful For Indie Filmmakers?) Point

As almost everyone reading this article knows, the company that first coaxed the American movie audience away from buying DVDs, to renting DVDs by mail, to streaming digital content to our homes (and mobile devices?) was Netflix.

But Netflix (as we currently know it) - i.e., the biggest subscription motion picture streaming service, reporting 27 million streaming video customers - may be doomed.

Why?

Because the revenue model for Netflix is based solely on subscriptions - and Netflix is starting to get serious competition from services that offer motion picture content as a lure for advertising and retail sales.

For example, in September 2012 retail giant Amazon announced a deal with Epix - a partnership between Metro-Goldwyn-Mayer, Lionsgate and Paramount Pictures - to add 2,000 movie titles to Amazon's Prime streaming service. The titles that Amazon is spending big money (the amounts are being kept secret) to exclusively acquire for streaming include "True Grit," "The Avengers," and "The Hunger Games."

With that move, the world's biggest online retail giant effectively put a boot on the throat of Netflix - increasing the number of titles in Amazon's video streaming library to more than 25,000 - but also signalling that Amazon was now willing to outbid Netflix for (hugely expensive) premium content. The day of that Amazon.com announcement, Netflix's market capitalization fell 6%.

The newly hot (billion dollar?) competition for streaming rights is a punch to the gut of Netflix. And Netflix was already on the ropes. For example, before the blockbuster Amazon.com deal, fewer than one in five of the Consumer Reports survey respondents said that they were highly satisfied with the choice of titles from their streaming service - and the great majority at that time (July 2012) were subscribing to Netflix.

Yes, Netflix has earned an honored place in the history of motion picture distribution - but they've been struggling to get content. When we look back, we may some day fondly remember that it was Netflix that convinced millions of us that our home movie behaviors could change (to rent by mail and then to streaming). But the viewing choices on Netflix are becoming increasingly limited. And competitors with deep pockets - like Google and Amazon, where the revenue model is advertising and retail sales, not just subscriptions - are exposing the weaknesses in Netflix's subscription-only plan.

So, the first part of this blogpost's heading may be right: Netflix (as we know it) might be doomed.

Why?

Because other companies with other business models, e.g., attracting users to a site with cheap movie subscription services, and then collecting information and eyeballs that can be directed to retail sales (Amazon) and advertisers (Google), are competing with huge amounts of capital that may make it impossible for Netflix to retain market share and profitability.

But the title of this blogpost also says that "All The "Film Is Dead" Lamentation Misses The Point."

Why?

What do threats to Netflix's future from companies that support themselves through advertising and retail sales have to do with the continued viability of 35mm film?

Isn't the argument about film v. digital a question of aesthetics or archiving great movies?

In my view... No.

For me... the bottom line in the film v. digital argument must also include a discussion of money.

And a failure to understand how the power in the motion picture BUSINESS has irrevocably switched from companies with a vested interest in 35mm film (and the scarcity that that format relied on for monetization) is at the root of the problems facing both Netflix and 35mm film.

Here's how I see it...

The way that motion pictures will be paid for in the future is evolving.

In the old days, motion pictures were made and distributed by studios that mostly used 35mm film. Scarce physical copies (e.g., access to 35mm film prints) that appealed to a mass audience were an essential part of what was being paid for.

In the New World, the revenue models are no longer based on physical copies of any kind. In fact, the very the idea of a simple subscription to obtain scarce motion picture content is under assault. And appealing to the fat part of the bell curve isn't the only way to make money. In the New World of digital circulation of content, the strongest companies provide access to all types of content - not just the top-selling items.

I'm not saying that HBO or movie theaters that handle premium content are going to disappear. But, in the New World, subscription-only services like Netflix (and HBO?) are under attack. And the motion picture BUSINESS has recently become very attractive to services that plan on using motion pictures as bait to lure viewers to a website. In other words, motion pictures attendance in theaters and from subscription-only services may soon be be usurped by services that use motion pictures to drive retail sales and advertising online. And these online businesses have made money by supplying the broadest range of content possible.

As Amazon and Google have shown, in the New World of online distribution, retail sales and advertising are NOT based on Old World concepts of mass marketing. Instead, Amazon and Google are adept at providing niche audiences with products selected from the output of thousands of separate suppliers.

Here's my essential point: If the money for movies starts flowing from businesses that understand the Long Tail, the types of movies being acquired for distribution may change: In addition to paying huge sums to exclusively license mass market films, Amazon and Google may also find that niche motion picture content (not shot on film nor made by the six major studios) may attract niche audiences.

If niche films and algorithms prove effective at reaching specific audience members - and Google and Amazon start using niche films to attract niche buyers - the studios may begin to lose their exclusive control of the motion picture business.

In the New World, isn't the goal to attract customers, find out about their preferences and respond to their unique needs?

Isn't that why Walmart bought Vudu's motion picture streaming business and why Google is now streaming motion pictures via Google Play?

Unlike the Old World of theaters and physical copies for the home and subscription services, in the New World of motion pictures the favored revenue model will apparently be online advertising and retail sales.

Paradoxically, I see the (vast?) amount of money being spent by Amazon and Google right now to control the online motion picture business as a great sign for indie filmmakers... suggesting that a massive paradigm-shift may already be underway.

Even if what I've suggested here comes true - and Google and Amazon (and Walmart?) end up dominating the online motion picture business offering a vast array of movies most of them shot for very little money using digital tools - some mass market films and some subscription-only services will survive and even thrive. And some theaters will continue to show 35mm films (there will be preservationist screenings in the developed world and, even though theater attendance in the US is in decline, some territories - e.g., China - are just opening-up to Hollywood movies, perhaps creating new opportunities for "exclusive" theatrical screenings on 35mm).

But the old Hollywood ways of monetizing films in theaters and the subscription-only services that have relied on mass market fare - the services that have dominated the motion picture business for years - seem to be facing a new set of challenges.

When companies like Google and Amazon - with little or no investment in theaters and selling physical copies of films and lots of experience with the Long Tail - control the lion's share of revenue for motion pictures, the argument about hugely expensive film v. cheap digital no longer makes much sense - unless you're an aesthete who loves film, an archivist who wants to preserve the past, or a Luddite who hates anything new.

UPDATE: DECEMBER 4TH, 2012 - According to a Dec. 4th, 2012 Press Release made available via Deadline, Disney has struck a new deal with Netflix to stream movies. This deal (which came as a surprise, after Disney titles had not been available on Netflix since February 2012) will make Netflix the "exclusive U.S. subscription television service for first-run live-action and animated feature films from The Walt Disney Studios."

"Beginning with its 2016 theatrically released feature films, new Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios and Disneynature titles will be made available for Netflix members to watch instantly in the pay TV window on multiple platforms, including television, tablets, computers and mobile phones. Also included in the agreement are high-profile Disney direct-to-video new releases, which will be made available on Netflix starting in 2013. Separately, Disney and Netflix have reached agreement on a multi-year catalog deal that today brings to U.S. Netflix members such beloved Disney movies such as “Dumbo,” “Pocahontas” and “Alice in Wonderland.”"

Financial terms were not disclosed, but all these rights couldn't have come cheaply. The LA Times of December 4th, 2012 is reporting that "a person close to the matter said Netflix could ultimately pay more than $300 million annually for Disney movies."

As noted in a Dec. 4th, 2012 slashfilm post, "[t]he announcement comes on the heels of Disney ending their own online streaming service."

What's also notable (as noted in a December 4th, 2012 post to thenextweb) is that "[t]he terms of the agreement mean that Netflix will now be able to show Disney movies in the ‘first pay TV window’, which advances the timing massively from when you would normally see content appearing on Netflix."

In other words, Netflix is changing their business model, cutting out the pay TV window (previously Netflix had obtained streaming rights to Disney films as a sub-licensor from the pay TV service Starz), launching Netflix into direct competition with HBO and Showtime.

In a prepared statement, Netflix's chief content officer Chris Sarandos called the deal a "a bold leap forward for Internet television and we are incredibly pleased and proud this iconic family brand is teaming with Netflix to make it happen."

FURTHER UPDATE: DECEMBER 5TH, 2012

In an update (that might have face-saving import for my prediction that Netflix "as we know it" might be doomed), a Dec. 5th, 2012 gigaom post elaborates on how Netflix plans on changing television forever. The post details how Netflix's Chief Content Officer Ted Sarandos to Harvey Weinstein's questions during a Dec. 5th, 2012 UBS Media conference.

Sarandos "made it clear that he doesn’t just want to steal away big blockbusters from the likes of HBO and Starz. Throughout the conversation, he explained that Netflix aims much higher: it wants to change television forever. Asked about how TV will look like in five years, Sarandos replied: “It’s gonna look nothing like we’re seeing today.”"

For example, Ted Sarandos said that time slots will fade away - except perhaps for sports and talk - and TV will become more personal: "Netflix has been investing in personalization for years, fine-tuning its recommendation engine to highlight movies and shows you might like to watch. However, so far most of this has been happening on the household level. Now, the company is taking steps to differentiate even further. One of the first steps was Just for Kids, the UI that separates kids’ content from other streaming fare. Next up are efforts to take this even further. “There is all of these things that we are looking at (around) deep personalization,” explained Sarandos. “Voice recognition, visual recognition.” In the future, Netflix could be able to pull up a user’s personalized recommendations as soon as that person walked into the room, he added."

FURTHER UPDATE: JANUARY 14TH, 2013

According to the January 14th, 2013 Hollywood Reporter, Netflix has signed a deal with Warner Brothers TV - for complete past seasons of Cartoon Network and Adult Swim fare (such as Children's Hospital, Robot Chicken and Aqua Teen Hunger) starting in March 2013 - and with Turner Broadcasting for the revival of Dallas which will air its first two seasons exclusively on Netflix starting in January of 2014.

FURTHER UPDATE: FEBRUARY 1ST, 2013

One inescapable problem for Netflix is that their subscription revenue is not growing as fast as their content costs. According to a February 1st, 2013 report in Bloomberg News, Michael Pachter, an analyst with Wedbush Securities, claims that: "Netflix will continue to generate negative cash flow going forward, driven by the company’s ever-increasing streaming commitments."


FURTHER UPDATE: APRIL 30TH, 2013

So it looks as Michael Pachter of Wedbush got it wrong in February 2013: Netflix reported a first quarter profit in 2013. Since the beginning of the year, Netflix shares have gained about 83 percent. But Michael Pachter (and I) are not convinced that this recent run-up in Netflix stock and one quarter of profitability are really the start of a long term trend. Because "other companies hold most of the DVD and syndication rights for the shows", the profits from House of Cards on DVD will take a detour through Sony - and the subscription growth and traditional media attention that House of Cards and Arrested Development are currently receiving may not be sustainable.

5 comments:

Randy Finch said...
This comment has been removed by the author.
nyindieguy said...

Randy,

I agree with your main point, which is that we are on the verge of a sort of gold rush by video aggregators for control of quality exclusive product, not unlike what happened at the advent of VHS rentals in the '80s. This is indeed good news for serious content creators, since it puts value on the product. However, this is a completely different scenario from the theatrical issue, where the major studios have effectively recreated the same barriers to entry that existed in the 35mm world. It also doesn't deal with the fact that there is no reliable business model (as of yet) that can support the cost of restoration and high quality encoding of deep catalog titles. The problem with the long tail that the independent sector seems to miss is that pennies per title only accrues to the benefit of the aggregators. To the content rights holders and creators, pennies are still pennies.

Michael Monello said...

The Long Tail theory is a nice way of looking at certain digital businesses but you can't make a living in the tail, as nyindieguy says. All the revenue come from the head, very little in the long tail so niche creators will not see competition drive up the value of their work like a Sundance feeding frenzy can occasionally do. Additionally, the current price wars are over mainstream content and are a temporary aspect of the market - the big guys are looking to aggregate the largest audiences right now. Apple, Google, Amazon, Sony and Microsoft are further looking to lock people into ecosystems via the hardware. They have a vested interest in keeping the price of content low in order to sell you new hardware each year. To them, "content" is anything they can make money from, and that includes cat videos, Gangnam Style, Rebecca Black, and Charlie Bit My Finger home videos - there is no difference to them between these and The Avengers or a new Wes Anderson film, it's all something they can slap an ad over or charge you to access. There is no business model for creators in the long tail unless you are aggregating your own audience and that audience is large enough to support your work (Kevin Smith being an example). Moments of great disruption are also great opportunities for smart, indie minded people, but it's dangerous to shift hope from one set of giant corporations (the studios) to another (the tech giants). Especially when the latter group has less of a vested interest in quality and is more concerned with aggregated mass audience. Meet the new boss, same as the old boss.

William said...
This comment has been removed by the author.
Netflix further said...

Interesting piece written on Netflix, willing to explore Netflix further.

Randy Finch's Film Blog:

Thoughts from a film producer about making and distributing films.