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Summary:

Sorry, TechCrunch, but Netflix isn’t the bunch of ninnies that you’re making it out to be. At issue is the possible 30-day delay on new release movies Netflix is willing to accept from Hollywood studios in exchange for lower acquisition costs. According to a Video Business […]

Sorry, TechCrunch, but Netflix isn’t the bunch of ninnies that you’re making it out to be.

At issue is the possible 30-day delay on new release movies Netflix is willing to accept from Hollywood studios in exchange for lower acquisition costs. According to a Video Business report last week, Netflix has been negotiating with studios to try and get as much as half shaved off the price of films to compensate for the delay in receiving new movies.

Much of TechCrunch’s coverage of the news talks about how a release window will only drive people to piracy. That’s a fair point, but the piece’s characterization of Netflix is a little short-sighted:

What’s really befuddling is that Netflix lacks the vision to see thorough this BS. They don’t seem to realize that longterm it’s going to screw them too. While new movies may not be as core to their business as they are to Redbox (which is suing many of the studios to stop something like this), new movies are the sexy lures that bring in new business.

To be sure, release windows suck from a consumer standpoint. But Netflix hardly lacks vision. On the contrary: It’s losing the DVD battle in order to win the overall streaming war.

Netflix CEO Reed Hastings has talked about how kiosk-based rentals like those from Redbox are Netflix’s primary competition. Hollywood is split on Redbox and kiosk rental; studios like Sony, Lionsgate and Paramount are for (and are working with) Redbox, while Fox, NBC Universal and Warner Bros. are against it.

The anti-Redbox camp wants to impose a 30-day new release window on Redbox. Redbox relies more on new releases than Netflix, which says that 70 percent of its business comes from its older title business. Kiosks by their nature are smaller and can’t hold a massive library of movies.

Netflix stated in its last earnings call that it was all for a “sales only” window before movies became available for rental. The enemy of my enemy is my friend and all that. If Netflix can push the release window idea and slow down Redbox’s rapid growth with little (apparent) impact on Netflix’s core business, well, why not?

But Netflix’s move extends beyond the physical DVD.

Netflix claims that 42 percent of its 11.1 million subscribers streamed content in the third quarter vs. 22 percent in the same period the year before. Meanwhile, an outside survey found that 54 percent of Netflix subscribers stream at least one movie or TV show per month. So the number of people streaming content is growing.

The problem with Netflix’s current streaming offering is its small content library, and the company has said over and over how it plans to invest more heavily in acquiring titles for streaming. If Netflix can negotiate half off its acquisition of DVDs, it can funnel that money into acquiring content for streaming to bulk up its library as the streaming service expands to more devices.

That doesn’t mean Netflix will suddenly get new releases to stream. The company is sticking with its subscription model instead of an electronic sell-through one, which naturally limits its ability to get newer releases. But if it can create a massive library of on-demand titles and secure more premium content, its subscription streaming offering would become even more compelling and Netflix would maintain a dominant role in the over-the-top video world.

At the end of the day, Hastings is neither stupid nor blind. Perhaps he’ll shed some light on his thinking during his talk at our NewTeeVee Live conference this Thursday.

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  1. I agree completely. Movie rental (and streaming) is not just an event-based business model, where point in time is critically important. Content rental/streaming has a very long tail. If Netflix can significantly cut its overhead without cutting jobs, they should do so. In the long run, a deep library (with as much streaming content as possible) is their best weapon.

    Eventually, big studios will find that this 30-day delay doesn’t help them in their war for short-term $$ or against piracy. When they realize this and come back to the negotiating table, Netflix will be in a fantastic starting position.

    Last – pirates will be pirates. Folks with the inclination to get their content for free and the will/time to seek it out will always do so. It seems highly unlikely to me that a significant number of people who are willing to pay for content (subscribers of services like Netflix) will turn to piracy just because of a minor delay, especially if Netflix’s library continues to deepen.

  2. This is even more brilliant in the face of the brewing debacle of the Blu Ray managed copy fiasco mentioned elsewhere today. Netflix is going to do whats best for the movie industry whether the movie industry wants them to or not.

  3. Great post Chris…I hope that Netflix concentrates their efforts on building out the streaming catalogue.

    As broadband becomes more ubiquitous and the masses get used the idea of accessing content online as opposed to needing a physical disc, streaming video will definitely be the big growth area for them.

    I suppose this type of cost cutting move could also be prompted by any number of other factors, whether that’s preventing layoffs (as David alluded to above), or just playing nice in the sandbox with the content producers to accomplish bigger goals down the road.

    -MK

  4. I’d much rather have a broader library of streaming content than the latest release hitting on day one. Hell, my queue has about 200 movies on it, and I don’t think I’ll be getting through it anytime soon. When I do have the time, being able to sit down and stream what I want immediately is always the highest priority, and why I came back to Netflix after leaving shortly after they started out. (Plus I love my Roku)

  5. I’ve had the same DVD’s out from Netflix for over a year now and haven’t even looked to return them (mainly because they’re all in boxes from moving but whatever). For over a year now I’ve exclusively used their streaming service. It’s only annoying at times when trying to watch a TV show that hasn’t been approved for streaming yet. But for that I have Hulu. Just got my disk for the Netflix PS3 service too so we’ll see how that goes.

  6. We know 42% of Netflix subscribers are streaming, but I wonder how many are streaming on their PCs vs. their TV (via the myriad of devices Netflix has partnered with). Pretty sure the devices are all setup as walled gardens, meaning you can’t stream pirated content through them. Therefore, the piracy argument only applies to those who are willing to trade of watching on their TVs for their PCs. I’m guessing the TV streamers are the more attractive demo.

    Another point–Hastings knows the biggest thing holding people back from the streaming option is the limited content library. I’ve read the libraries is constrained by the cash Netflix needs to buy the rights. So this deal would make more content affordable, increasing the library. If I had to choose between getting 2 out of 10 new realses right away, or 10 out of 10 new releases 30 days late, I’d take all 10.

  7. ParisLemon » TC Post On Netflix/Hollywood Sunday, November 15, 2009

    [...] TC Post on Netflix siding with Hollywood on 30-day rental waiting period for new releases. NewTeeVee seems to think I’m wrong and that Netflix isn’t dumb for doing this. To be clear, as I say in the [...]

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