Markets

Why Media Conglomerates Underestimate Netflix at Their Peril

By Catharine Taylor

Updated on: December 14, 2010 / 9:02 AM EST / MoneyWatch

Media can be a contentious business, but it's not so often that you hear a prominent media executive say this about another prominent media company: "It's a little bit like, is the Albanian army going to take over the world? I don't think so."

The "it" in question is Netflix, and the executive who said it (to The New York Times) is Jeff Bewkes, chief executive of Time Warner. But what looks like a "what-me-worry?" quote is actually fighting words. Per the Times, the fight is on because it's not too long before Netflix has to re-negotiate its deal with Starz Network to distribute Sony and Disney movies, and that will set the stage for Netflix having to pay more to content companies going forward. A few years back, the company -- which now streams more content than it mails -- signed a deal to stream Starz content for $25 million per year, a fraction of what cable operators pay to offer the same content. (Just to be clear, Starz is not owned by Time Warner.)

But while Bewkes fights off Netflix with Albanian army analogies, the fact is that Netflix has ambushed the video content industry. By the end of 2008, the year the Starz deal was struck, the service had 9.4 million subscribers, and streaming was in its infancy. By the third quarter of 2010, Netflix had almost 17 million subscribers -- an increase in less than two years of more than 44 percent (oops! more than 80 percent) -- and its business was rapidly shifting to streaming from mailing out DVDs.

So, despite Bewkes' bravado, now content providers see what it really is: a threat -- and so that means it's high time to turn the screws. Content companies hope that the coming Starz negotiation signals the end of Netflix's sweetheart deals, and that, they no doubt hope, will also end what is so far one of the most enticing things about Netflix -- that it offers boatloads of streamed content for under $10/month. As the theory goes, hike up the amount Netflix has to pay content producers by as much as tenfold, and suddenly it has to raise rates, the subscriber growth slows, and Netflix has been put in its place.

But I'm not sure it's so simple. Time Warner -- and other companies with interests in cable -- are trying to keep their viewers down on the farm by letting them stream all the content online they want, as long as they authenticate their cable subscription when they do so. Most of this falls under the Bewkes-led initiative TV Everywhere, but the larger point is to keep people from exploring alternatives to the cable.

Where that argument just might fall apart, however, is in how consumers view media as opposed to how media companies view it. To an extent, media companies think of their content by media brand, be it keeping people watching NBC, or HBO, or even Hulu. Consumers, however, are only interested in individual media properties. At the end of the day, it doesn't matter to them who produces 30 Rock, or the Harry Potter movies or True Blood or the World Series, as long as they have access to it.

But if the media companies have their way, a lot of streaming content will be distributed according to media brand. Sure, you can buy a package of movies distributed by 20th Century Fox, but if the movie you really want to see was produced by Paramount, you could be in for another fee. Tough luck.

In contrast, what Netflix has been -- to this point -- is the Internet's most comprehensive content play. That -- and the affordable price -- is what's currently making it so popular. So, if Time Warner and its brethen win, it's not only Netflix that loses, but consumers. Albania, meet corporate America.

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