NetFlix Big Bet On Streaming Video Will Succeed

Last Updated Aug 11, 2010 3:32 PM EDT

Netflix (NFLX) announced yesterday that it will fork over around $1 billion to Epix, a fledgling pay-tv channel, over the next five years. In return it will get the right to stream 1,500 new films from Epix backers, Paramount, MGM and Lions Gate.

This amounts to a long term bet on the future of streaming video. The addition of these films won't generate a sudden influx of new subscribers to repay this investment anytime soon. But Netflix is willing to pay upfront to solidify its position as the number #1 streaming service -- and prevent obsolescence -- down the road.

The Wall Street Journal considers this is a risky gamble. Netflix, "must attract 500,000 new subscribers a quarter" in order to offset the payout for the Epix deal. "Any fewer subscribers and the company would erode its 35 percent profit margins that investors have come to love."

In the short term, Netflix stock, which has doubled in value over the last year, will probably fall back to earth. But the company recognizes that the faster it weens its subscribers off physical mailing, the better positioned it will be to capitalize on the explosive growth of streaming video on phones, tablets and internet connected TVs.

Ted Sandros, Netflix chief content officer, told the NYT that his company is essentially taking the huge pile of money it pays for postage and using it to cover fees for streaming rights to film studios and tv networks.

The new deal includes an important clause that prevents Netflix from showing these films until three months after their debut on Epix. This window is intended to placate Epix cable TV partners: Verizon (VZ), Dish Network (DISH) and Cox Cable.

The delay might seem like a major downside for Netflix, but as I've written earlier, the company's long term strategy is to avoid going head to head with the studios and networks. It's plotting a long, smart path toward a niche as the fullest archive of streaming content, if not the freshest.

With the addition of these films Netflix extends its lead as the deepest catalog over competitors like Hulu, Amazon (AMZN) and Blockbuster (BBI). Hopefully shareholders will have the patience to see this wager play out.

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  • Ben Popper

    Ben Popper writes at the intersection of culture and technology. His work has been published in the NY Times, Washington Post, Fast Company, Rolling Stone, The Atlantic and many others. He lives at www.benpopper.com.