The popular phrase “cutting the cord” is almost synonymous with Netflix. The vast library of shows and movies offered on Netflix’s streaming platform singlehandedly upset the entertainment industry and helped millions of consumers forgo the monthly $100 cable bill. It’s hard to imagine a modern entertainment world without Netflix.
But if you remember, Netflix wasn’t always the multi-billion-dollar media powerhouse it is today. The company started in the late 1990s as a DVD-rental-by-mail service. As it continued to grow at the expense of brick-and-mortar movie rental stores like Blockbuster, around 2007 it started to offer a spattering of titles that you could view right on its website. For those that remember, movies that were available to “Watch Now” came and went pretty quickly, and the perk was rolled out as somewhat of a novelty for the company’s DVD rental subscribers.
However, the ability to watch big name movies and prime time TV shows right on Netflix’s website (there were not streaming devices or Smart TVs yet) quickly became very popular, and Netflix’s streaming library continued to expand. By 2010, Netflix had become the largest source of Internet streaming traffic. Today, the company boasts about 150 million streaming subscribers.
For the past several years, times have been pretty good in the streaming world. By becoming a multi-billion-dollar company, Netflix has had the cash necessary to broker contracts with the big media companies and amass a seemingly endless library of movies and TV shows. And the media companies have happily taken Netflix’s money, sometimes in the hundreds of millions of dollars, in exchange for the rights to stream their content. This has been a huge win for Netflix’s millions of consumers, who have had unlimited access to thousands of titles for just $13 (and in the past, even less than that).
But the comfortable status quo is about to be shaken up. Having seen how Netflix has made billions of dollars off their own content, some big media companies think they can make more off their library if they go their own way and offer their own streaming services. NBCUniversal, WarnerMedia, Apple, and Disney are all in the process of starting their own paid streaming services and are declining to renew their contracts with Netflix for the rights to popular shows like The Office and Friends, hoping to use those popular titles to jumpstart their own services.
On the surface, this balkanization of media by way of the "streaming wars" may look like the beginning of the end for Netflix. Many writers seem to think these big, moneyed media giants are about to take big bites out of Netflix’s market share. But I think the media companies are about to learn a lesson that amassing a streaming empire like Netflix’s isn’t as easy as it seems. After an experimental period, I believe the media companies will return to their partnership with Netflix. Here’s why, from two angles.
The Top Line Challenge - Getting Subscribers
Remember that Netflix didn’t enter the scene one day as a streaming service and automatically garner millions of subscribers. Theirs is a 20-year evolutionary history that didn’t begin in streaming at all, but rather, with DVD rentals. The DVD rental subscribers became the company’s foundation from which Netflix was able to pioneer its streaming services and continue to gradually grow.
To replace the multi-million-dollar contracts the media companies are choosing to cancel with Netflix, the media companies will need to sign up millions of $10-per-month subscribers virtually overnight. That’s no easy feat. This will involve an enormous marketing effort with no guarantee that consumers are willing in the first place to sign up and pay for yet another streaming service. From their perspective, the media companies may think it’s as easy as starting a new cable channel and getting it added to cable and satellite lineups. Most media companies own several cable channels and automatically make a few dollars per month from every cable and satellite customer whether they watch those channels or not. But getting customers to voluntarily go out of their way to sign up for a new service and fork over their credit card information is another animal entirely.
And there is such a thing as “streaming fatigue.” There are so many streaming services now, from streaming TV packages to On Demand services to even a premium version of YouTube, that many customers are losing interest in yet another TV channel trying to get them to sign up and pay for something else. One study suggests that customers are most comfortable spending $21 on streaming services. So, besides Netflix, which will remain king, most customers are generally willing to subscribe to one additional service. There simply isn’t demand out there for a bunch of streaming services.
Even more, the media corporations are relying on their popular classics to lure subscribers to their new services, but they are overestimating those shows’ allure. For example, NBCUniversal is counting on The Office attracting consumers to their service. Sure, The Office is the most popular show on Netflix and accounts for a whopping 7% of all Netflix’s streaming traffic (by one estimate). But if The Office migrates to NBCUniversal’s app, I don’t see consumers automatically forking over $10/month for it. If you are a big fan of The Office, you could buy the complete series on DVD for just $50, or you could just as easily find reruns on TBS or pick up the DVDs for free at your local library. But in reality, without The Office, you’d probably just find another relaxing quirky sitcom on Netflix to put on while you do your work or chores. It’s a great show, and one of my favorites, but not worth $120/year to rewatch.
The Bottom Line Challenge - Costs of Doing Business
The big established media corporations have deep pockets, so they won’t be deterred at first by the costs of starting up a streaming company. But the service still has to turn a profit, and indeed, a bigger profit than the easy money Netflix was willing to pay for their shows.
At the risk of following a tangent, I think it’s worth using Pemex, or Petroleos Mexicanos, the state-owned petroleum company in Mexico, as a lesson from history about the unexpected costs of doing business. In the early 1900s, private companies like Shell and BP drilled for oil in Mexico and those companies were taxed. But in 1917, the Mexican Constitution stated that all hydrocarbons belonged to the nation, the oil wells were seized by the state, and the Mexican government established Pemex to administer the national supply of oil and provide cheap gasoline for Mexican citizens. However, by the 1960s, despite the country’s abundant natural resources, Mexico became a net importer of petroleum. The state-run company was overburdened by the costs of operation and modernization. As the wells they seized from private companies dried up, without the expertise or funds to drill new wells, Pemex produced less and less gasoline for Mexican citizens and became an ever increasing burden on the federal budget, a net loss for the country.
So what’s the point of bringing up Pemex? It’s this - It is often wiser to lease your assets to an established payor than to try to sell your asset yourself. In the case of Pemex, if the Mexican government had done nothing and simply taxed the oil companies drilling on their land, they would have raked in billions of dollars. But when they tried to produce the oil themselves, they not only forfeited the tax revenue they could have gotten for free, but the endeavor became a net loss for the country.
The same will likely happen to the big media companies venturing into the domain of streaming subscriptions. Until now, media companies have only had to sit back and rake in the royalties Netflix has been paying for the rights to stream their shows. When they go their own way, the media companies will have to pay for the IT infrastructure, customer service, advertising, and all the other overhead costs Netflix already shoulders, and still sell enough new subscriptions to both pay the bills and replace those multimillion-dollar Netflix contracts. It’s a big risk and a long shot to say the least.
All that is to say, don’t fear for Netflix just yet. With the media landscape constantly changing, the media giants will need to make their streaming properties as profitable as possible as we head into the future. When faced with the immense costs of doing business, the difficulty signing up new customers, and the realization that it makes more fiscal sense to lease the rights to Netflix and other established players in the marketplace, they will come back. Just give it time.
