Can Netflix Compete with Pay TV Operators?

In March 2011 Netflix announced that it acquired the distribution rights to the series House of Cards, outbidding HBO.  The series is based on a BBC mini-series and stars Kevin Spacey.  It is the type of show that would typically air on a pay TV network, like HBO or Showtime.  Some speculate that Netflix paid as much as $100 million for these rights.   This may be the start of a strategy for Netflix to distribute original content and compete directly with channels like HBO or Showtime or even with Pay TV Operators, as it is distributing both old content and new content.

In order for a strategy that includes the distribution of original content to help Netflix compete effectively, they will need to produce, or license, a significant amount of new “hit” programming, and that will probably take a lot of cash and luck.  Netflix has a significant amount of cash but licensing “hit” content isn’t the only part of its business – and they need some of that for deals with other libraries, such as Starz and Epix.  Additionally, there is no guarantee that any piece of content will be a hit so they would need a breadth of content to ensure some hits.  Netflix does have the advantage that they know exactly what DVDs people are renting and what content people are streaming so they can market a piece of content directly to users – but, marketing alone does not ensure a hit show.

Netflix licensed content from Starz in 2008 to stream 2,500+ movies over a period of 3 years for $30 million.  That deal expires in late 2011 and Netflix is not likely to get similar terms.  Future content deals are likely to cost much more, so some of Netflix’s cash needs to be allocated to that deal and others for already produced, popular, content.

Content owners may already be starting to rebel against Netflix’s potential strategy because they don’t want Netflix to be a direct competitor.  Current Showtime shows will only be available through the Showtime Anytime broadband service. Starz recently changed their policy such that original Starz programming will be available on Netflix 90 days after it premiers on the channel instead of 24 hours after it premiers.  These changes could affect how some users use Netflix if they want the content more quickly.  Users may end up going to other sources for this content.

If Netflix decides to go for an original content strategy, it’s possible that the company will have to raise its subscription prices, which it may have to do anyway as content deals from Starz and others gets more expensive.  It is unknown how much more consumers would be willing to pay to stream for content on Netflix.  One potential option is that Netflix goes to a tiered model with different content available at different levels but that could be more complicated than Netflix wants, though they do have a tiered strategy for DVDs.  Also, typically to date, much of the content on Netflix Watch Instantly has been “library” content, so studios have just been thrilled to have a new distributor for this content that they may not have sold anyway.  If Netflix becomes a direct competitor, content owners may decide to look elsewhere (perhaps to Amazon?) to license their content.

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