The unofficial end of summer has passed with the Labor Day weekend, and with it goes a three-month stretch of bad news for online video viewers:
- Netflix (s NFLX) announced and implemented a new pricing plan that increases the cost of DVD and streaming by as much as 60 percent
- Starz walked away from contract negotiations (s LSTZA) with Netflix to renew its streaming deal, and its content will disappear after Feb. 28 next year
- Hulu was put up for sale after receiving an unsolicited bid, and the possibility of an acquisition has raised serious questions about its business model
- Meanwhile, Fox has implemented an eight-day window (s NWS) on Hulu and its own network site for viewers who aren’t subscribers to one of its pay TV distribution partners
In other words, the summer has marked a major pullback in the amount of content that is available, as well as a major change in the way it’s licensed, priced, accessed and paid for. But more importantly, it shows that traditional media companies have moved past experimentation mode and are finally formalizing business models around digital distribution.
The empire strikes back
If the past few years of success by upstart digital distributors like YouTube, (s GOOG) Netflix and Hulu represented Act One in the story of how content moved online, we’re clearly moving into a second phase, where the incumbents assert their power and launch their own attacks in the battle for consumers’ attention.
For TV programmers, the main weapon in the fight has been TV Everywhere. The idea is that cable subscribers can watch streaming on demand content, so long as they log in and prove that they pay for the network that they’re trying to access. This has proven highly successful for networks like HBO, (s TWX) which has seen millions of downloads for its HBO Go iPad app.
While originally introduced to provide more value to cable subscribers by putting previously unavailable content online, the model is now being emulated by the broadcast networks. The first to do so is Fox, which is now requiring a pay TV login for next-day access to new episodes of its shows on Hulu and Fox.com. But ABC is also reportedly interested in doing the same, and other broadcasters are sure to follow.
Of course, when applied to cable shows, the TV Everywhere model has the effect of providing more value to paying customers. But for broadcast content, authentication ends up taking away access to shows that were previously available for free on an ad-supported basis. The issue is further complicated when not all distributors are on board, as is the case with Fox. Of all the pay TV operators, only Dish Network (S DISH) has committed to enabling authenticated access to Fox shows online — which means that the vast majority of cable and satellite customers today are no better off than those who don’t pay for TV.
The changing economics of digital content
At the same time that content players like Fox are building walls around their newest content, they’re also making it increasingly more expensive to license for digital distribution. The best example of this is Starz, which originally struck a three-year deal with Netflix pegged at around $25 to $30 million a year. Last week, it reportedly turned down $300 million a year for the same content.
Not only does the Starz example show how much more expensive streaming licenses have become in a very short period of time, but it also highlights a general pullback in the willingness of networks to make their content available online.
There’s a fear among Wall Street types that this increase in the cost of content will ultimately undermine the Netflix model — that Starz is just the first of many content providers that will demand more than Netflix and other online distributors are willing to pay. Unable to provide a compelling content package, these distributors will see their subscribers flee.
Netflix as modern-day cable network
What these fears overlook, however, is that Netflix has never been about providing the newest releases or most popular Hollywood movies. In a statement after the Starz non-renewal, Netflix CEO Reed Hastings reported that Starz content makes up just 6 percent of all viewing on it’s streaming service.
That’s because viewers don’t necessarily log into Netflix looking for a certain piece of content — about 60 percent of all Netflix viewing comes from click-throughs on movies that are recommended to subscribers. Even if Netflix isn’t able to offer up the latest release from Disney (s DIS) or Sony (s SNE) pictures, it will be able to recommend something they might want to watch instead.
In many ways, the Netflix model and content catalog isn’t terribly different from what you might expect to have seen on cable a few years ago. Netflix is no HBO, but it might be TBS: the channel that catches your attention when there’s nothing else good on TV. Let’s not forget: Basic cable networks survived, and even thrived, on old movies and syndicated TV shows long before they began making award-winning original programming of their own.
Digital revenues finally matter
Content producers and online distributors increasingly have a symbiotic relationship; on their earnings calls, executives from CBS, (s CBS) Disney and Viacom (s VIA) all acknowledged that revenues from digital licenses were providing a boost to their top and bottom lines. The amount that Netflix, Amazon, Hulu and others are contributing is still small relative to their overall businesses, but it’s finally real revenue, not the digital pennies that then-NBC chief Jeff Zucker famously lamented just a few years ago.
Furthermore, there are now more digital licensees than ever. Netflix has grown large enough to spend billions of dollars a year on streaming rights. Amazon is investing heavily to grow its own streaming library and compete with Netflix. Meanwhile, Dish Network (s DISH) and Apple (s aapl) — which have stood on the sidelines while others grew their subscription video-on-demand businesses — are both rumored to be rolling out their own Netflix competitors soon.
The big knock against online distributors to this point has been that they potentially cannibalize viewership from more traditional channels, but without paying the same in revenues. There’s still an imbalance in the amount of money online distributors contribute, but as DVD sales and broadcast ratings decline, it would be foolish for the content companies to destroy new nascent competitors that provide an important new revenue stream.
More choices, not fewer
There’s a tendency to question the viability of digital video providers, given the general pullback that we’re seeing from the networks. But this type of short-term view overlooks the fact that viewers have more content choices now than at any other point in the past.
It’s not like 30 years ago, when the local cable company was the only game in town, or 15 years ago, when satellite finally provided a viable alternative, or even five years ago, when AT&T (s t) and Verizon (s vz) began offering up competitive IPTV services. The emergence of online distributors are creating even greater competition for viewer attention — and they’re doing so at competitive prices.
Netflix, Hulu, Amazon Prime Instant Videos and other subscription video-on-demand service might not have all the same content that is available on broadcast, cable or satellite TV, but they’re not supposed to have it all. Their value proposition comes from providing a wide range of TV shows and movies, and a smart way to find new content of interest. And more entrants will soon emerge, soon offering up even more choice.
So what does the future hold?
Online viewers might lament the disappearance of certain TV shows and movies from their online destinations today, but the trend looks temporary to me. As more subscription and ad dollars move online, more premium broadcast and cable content will follow. The latest pullback, then, seems a minor bump in the road to an otherwise broader array of content available online.
More importantly, the success of digital distribution platforms means new and different content to choose from, beyond just what is syndicated and re-broadcast from network television. Hulu has been showing web originals for some time, and looks like it will continue to do so. Netflix made headlines when it announced it would exclusively license the Kevin Spacey-David Fincher series House of Cards to run on its streaming service instead of pay TV channels like HBO or Showtime. And YouTube is quietly building an empire of web original content, which it is expected to program into channels — basically building the online equivalent of a 21st century cable company.
In short, as viewers increasingly move online, there will be no shortage of content to choose from. In the same way that cable networks came into their own despite costs associated with syndicating broadcast content, Netflix, YouTube, Amazon and others will continue to grow — and continue to offer an alternative to the incumbent production and distribution networks.