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Is Netflix’s streaming focus building a house of cards?

Is Netflix’s streaming focus building a house of cards?


The Watch Instantly model puts Netflix at the mercy of its content and hardware partners

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ecosystems netflix
ecosystems netflix

It’s easy to take Netflix for granted. These days it seems like every tech and telecom company with a pulse offers you streaming video to rent and buy. Sure, it blew your mind the first time Netflix delivered you a DVD and you could return it WHENEVER, but those little plastic discs are so outdated these days that even Netflix doesn’t want to sell them anymore.

But you’ve got to remember that the company’s DVD by mail model was the straw that broke the back of the rental industry dominated by Blockbuster and its ilk, fundamentally changing how people rented movies. Since then Netflix has consistently set the pace for all-you-can-eat video over the internet. Despite the growth of Hulu, Amazon Instant Video, and other competitors, Netflix remains synonymous with streaming video in the US, where it’s estimated to take up about a third of downstream broadband traffic. But though Netflix still has the lead, its position as the final destination for streaming video seems increasingly threatened by the fact that it doesn’t own the content it plays or the platforms it runs on.

Netflix’s biggest advantage — and its biggest risk — is that it’s a pure online delivery service. While it’s flirting with original content, Lilyhammer and House of Cards, it’s not a studio-backed project like Hulu. Unlike Apple, Microsoft, Sony, or any number of other manufacturers, it’s not building hardware, and it doesn’t combine streaming with physical shipping incentives or ebook lending like Amazon Prime. Even upstart DVD rental business Redbox partnered with Verizon to provide streaming video rather than standing on its own.

This single-minded focus on streaming has put Netflix on top

This single-minded focus on streaming has put Netflix on top so far, with a bigger catalog in more countries than anyone else. And for a while it was pushing the stock to record highs each month. CEO Reed Hastings has argued that more diverse companies simply can’t devote the resources to catch up. "We can do a better user experience on video because it’s our only business," he told The Wall Street Journal in September. Though he’s named Amazon’s Instant Video as the biggest potential Netflix competitor, he also called it a "confusing mess," criticizing Amazon’s decision to add unlimited streaming to its low-cost shipping plan.

The drive to pare down services, however, was also the source of Netflix’s biggest blunder. Last year, Netflix angered customers by splitting its streaming and DVD rental plans into two higher-cost options, then moved to spin off DVD rentals altogether as a service called Qwikster. While the plan was scrapped, the move cut the stock from nearly $300 to just $80 a share. The company was fundamentally right about the promise of streaming video, but by aggressively downgrading DVD plans instead of allowing them to fade away, it alienated customers and changed the narrative frame around Netflix. It was no longer the untouchable golden child. CEO Reed Hastings even issued an official mea culpa.

But the bigger problem for Netflix is that in the end, both the studios that provide content and the cable companies that push it to consumers would rather deal with multiple services or even prioritize their own. While Netflix has managed to win over some of its most strident detractors, it’s also proven that streaming video is a viable model for others. Time Warner CEO Jeff Bewkes, who repeatedly criticized Netflix and other streaming video sites, now credits them with driving TV revenue. Bewkes complained in 2010 that "once you put [content] on Netflix, you really can’t sell it anywhere else," but he now says Time Warner is "doing business with multiple players," and that streaming subscription services brought the company $100 million in the third quarter of 2012.

Streaming rights to Starz originally went for around $30 million a year, but by 2011, even a $300 million offer wasn’t enough

The Netflix streaming catalog is still substantial, but some of its most attractive content has either been pulled or can be found elsewhere. Earlier this year, an exclusive deal with Epix expired, giving Amazon a crack at major releases like The Hunger Games or The Avengers. About a year earlier, Netflix was struck a larger blow: Starz, which owned the streaming rights to Disney and Sony Pictures films, declined to renew its agreement, leaving Netflix bereft of what it once called “one of our most important deals.” Streaming rights to the Starz catalog had originally gone for around $30 million a year, but by 2011, streaming video had become big enough that even a $300 million offer reportedly wasn’t enough. And some shows and movies will likely never come to Netflix or any other online service. HBO fans, for example, have pushed for a standalone version of its streaming app, but the company has refused to do so except in its low-risk Scandinavian markets.

At the other end of the pipe, Netflix has run up against broadband data caps. Comcast pushes its own Xbox streaming app by exempting it from the usage limits imposed on Netflix and others, leading Netflix CEO Reed Hastings to complain that "Comcast should apply caps equally, or not at all." Since many ISPs are also cable providers with no interest in having one of their biggest products cannibalized, Comcast isn’t likely to back down unless officially ordered to do so.

Watch Instantly isn’t a sideline that can be subsidized with retail sales or standard cable viewership

None of these problems affect only Netflix, but unlike its competitors, it has nothing to fall back on. Watch Instantly isn’t a sideline that can be subsidized with retail sales or standard cable viewership — it’s the whole company, unless you count a steadily dwindling DVD rental business. Hastings has also committed to keeping the current pricing tiers, which is good news for consumers but puts pressure on Netflix to keep expanding the userbase. The situation increasingly mirrors what’s happening in the market for streaming music, where services like Pandora and Spotify are beginning to add real money to the record label’s bottom line, but can’t manage to turn a profit themselves. Netflix may be far and away the largest subscription service for streaming video, but increasingly that looks like a pyrrhic victory. While discs may be passe, Netflix’s role as a streaming middleman is far from a sure bet.

Tim Carmody contributed to this report.

Explore the ecosystems

Last week we took a close look at the future of TV and the living room — the great unclaimed space of the technology world. Check out the links below for a close look at all the major players, along with a full range of interviews with industry players and reports on everything from the state of remote controls to the future of gaming. Here’s a sampling:

Google, Microsoft, Aereo, Boxee CEO Avner Ronen
Wednesday: Amazon, Sony, live sports, TV apps, Condé Nast’s Dawn Ostroff, NBC's Vivian Schiller
Thursday: Apple, the state of remotes, Vizio CTO Matt McRae
Friday: Independents, New Yorker's Emily Nussbaum, Valve