Posted by: hdemott | December 20, 2010

An Open Letter To Jeff Bewkes, Chase Carey, Brian Roberts, et al. re Netflix

The following quote comes from Reed Hastings, (here) CEO of Netflix to Whitney Tilson of T2 Partners – who has been short Netflix stock – and has recently become both open and vocal (here) about his heretofore losing position:

“Another competitive threat is TV Everywhere. If MVPDs (multichannel video programming distributors) are successful at getting their subscribers (which is practically everyone) to use TV Everywhere, which is free, instead of Netflix, for streaming video, then the market opportunity for supplemental services like Netflix and Hulu Plus will be much smaller. There is no additional profit for MVPDs in TV Everywhere, but they are motivated to slow the growth of supplemental services because of the fear that someday the combination of ESPN3, Netflix, CNN.com, Hulu, YouTube, and others could be an effective MVPD substitute over the internet. The TV Everywhere threat will grow over time, but is unlikely to bite in 2011 in a short-satisfying manner.”

Let’s face it – Netflix competes directly with any existing video service out there – and does so at a very affordable price. Content creators doing deals with Netflix have generally taken their money, under some sort of restriction, but ultimately given them their valuable content on the assumption that Netflix is a long tailed service – and is really additive to the overall video pie – and not competitive with it. Thus, any payments from Netflix were simply margin enhancing and represented a whole new front in content monetization.

Recently, you have started to hear the drumbeats from people who are in the position to know. Jeff Bewkes has come out against Netflix and their streaming service (here) – probably realizing that $8 per month for tons of long tailed content (and some more recent stuff) is a pretty good deal relative to HBO – which charges consumers $10 per month for very little current content (and if you are willing to watch DVD’s – older content). You are essentially paying $10 per month for HBO’s original programming – which may or may not appeal to you. Time Warner has seen HBO subs decline for 2 years running – and there just might be something to the argument that cutting off HBO to add Netflix is a pretty good deal – unless you absolutely need to watch HBO original programming the night it airs. After all, as soon as the DVD’s come out – you can watch them on Netflix anyway.

All of the major content creators have their own dog in the fight – and none of them seem to agree. CBS isn’t on Hulu. Fox and CBS are blocking Google TV. Different content guys give Netflix different windows for streaming – and different windows for DVD rentals. Ask 6 studios what their deal with Redbox is, and you will get 6 different answers. What content is available on Hulu? On Hulu Plus? And in what window? The truth is that no one knows.

So here’s a solution for the media world:

Adopt TV Everywhere. With a twist.

Jeff Bewkes is absolutely right in his viewpoint here. But he doesn’t go far enough.

What the cable and content guys should do is exactly what they have always done – which is to protect their existing business model. Sure they fight over retrans, and sure they argue over the value of some content – but all in all they are trading nickels around the edge.

Also, the consumer has spoken fairly clearly in that they want the 4 any’s as Glenn Britt of Time Warner Cable puts it: any content, any time, any place, and on any device. That’s what a winning service should look like.

So – here’s what I would do.

I would absolutely get everyone on board with TV Everywhere. If you pay a cable or satellite company for delivery to your house – you get the access to the same programming on any IP device you want. In addition, you get it anywhere you have internet service – and based on the programming – time shifting of one sort or another should be enabled.

But I wouldn’t stop there.

The cable business particularly, is filled with tremendously bad UI experiences – and while the new Comcast (check out what Brian Roberts thinks of Netflix here) , Time Warner Cable and Directv UI’s on the iPad look great – I would make it simpler for the industry.

I would do a deal with Hulu and adopt it as the standard for TV everywhere. If you have a cable subscription, you would have a Hulu subscription. Consumers have already voted and like the Hulu experience – so why not make it easy for the consumer.

But I wouldn’t end there.

Right now, the cable operators are the number one customers for Time Warner and Disney etc… and could easily replicate the NEtflix experience online. So that’s exactly what I would do – and I would call it Hulu Plus (simple eh, it already exists). Hulu Plus would go from a reasonable programming service to a Netflix killer – allowing consumers to access all sorts of long tailed programming that is not being well monetized currently – except by guys like Netflix.

That’s it plain and simple.

You continue to keep the economics of the existing model – you give consumers what they want – and you offer consumers more of what they would like – and you head off a competitor.

Why these guys can’t see this is beyond me – but hey – this is what they get paid the big bucks for.

Sure they might goose earnings by $0.01 by breaking ranks and taking a little more from Netflix – but in the long run Reed Hastings has almost 20M subscribers by giving consumers what they want. He’s a pretty smart guy – so why not take his advice. It’s working fine for him!

It all comes down to this: Netflix is in the aggregation of content and distribution business – just like the cable MSO’s. Unlike them, however, they have no physical plant (and to add insult to injury they deliver their content increasingly over the infrastructure of the guys they are competing with) and unlike them they are growing rapidly. Content guys need to realize this and treat them the same as any other MSO. If they want a specific window – they should be charged similarly. Thus, Neflix should be able to get ESPN – at $4.50 per sub per month!

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Responses

  1. Good position. Regarding the frustration over how the other guys just can’t seem to see what is front of them, it comes down to serving the customer.

    I have noticed your positions stem more from allowing the customer to have what he/she wants at a reasonable price…yet our system still rewards those that gain money from customers who think they have no other outlet.

    Face it, those that are running in circles have no time to check out other options. On top of that, the old city governments choosing who gets to be the cable provider has proven negative…but you’re stuck.

    The true overlay of wireless reception/transmission is the only logical way forward.


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