I love Netflix. They’re one of my favorite companies. I think they run their business right both internally and externally. That’s why it was so painful yesterday when they stabbed me in the heart.
As you may have heard by now, Netflix reached an agreement with the movie studio Warner Brothers to hold off on the release of new Warner Brothers DVD and Blu-ray movies until after they’ve been on sale for 28 days. Similar agreements with other major studios are likely to follow. That means you can kiss new release rentals goodbye on Netflix. Simply put, this is bullshit.
We’ve known that such a deal was potentially in the works for a couple of months now, but I still cannot believe Netflix went through with it. Well, let me restate that: I understand why they did it from a business perspective (more on that in a second), but I cannot believe they would do this to their customers. With almost every product, there’s a golden rule: You don’t take away features. But that’s exactly what Netflix is doing here.
Why are they doing it? Well there are a few reasons. First and foremost, Hollywood has been pressuring DVD rental services to do this for some time. Why? Because their golden calf is bleeding: DVD sales. While most people look to box office results to see how well a film is doing, for many movies, since the advent of the DVD, Hollywood makes much more money off of DVD sales. But over the past couple of years, those sales have started to decline, quickly. In fact, 2009 marked the first time in seven years that box office receipts beat DVD sales (both due to falling DVD sales as well as increased movie ticket prices). Hollywood believes that cheap rental alternatives such as Netflix, and even moreso, Redbox (those $1 red kiosk rental stations you see in grocery stores all over), are to blame. So how do you stop that? Well, you cut off the supply chain to Redbox, and you threaten to do the same to Netflix unless they enter into a ridiculous agreement like this.
But it’s not all Hollywood’s fault here. Rather than fight it, Netflix is willing to do this because they’re also getting a better deal from the studios for purchasing those movies after this 28-day window. More importantly, they’ll have more streaming rights for the content from these studios under this deal. This is the key.
Netflix clearly believes that its streaming business will one day be its core. And they’re absolutely right. That said, we’re still at least a few years away from the demise of this DVD rental model (and they actually think its even farther off). But Netflix is willing to take the risk and pull the trigger on this now because some 70% of its rentals are catalog (older) releases. So they’re willing to alienate those other 30% to ensure they maintain a cordial relationship with Hollywood, and move towards their streaming future.
Unfortunately for us, the consumers, we’re screwed short-term. Even if Warners and the other studios give Netflix some newer releases to stream after the 28-day window (currently, most Netflix streaming movies are older films), they’ll still be at least 4 weeks after their DVD release. And they undoubtedly still won’t give up all of their new releases to stream even after this window because of the antiquated deals they have in place with the cable TV stations to give them rights to run movies first.
The whole thing is turning into a nightmare of rules and regulations. And you know what happens when bureaucracy makes things hard on the people? They rebel.
Hollywood thinks that with this new 28-day window deal, the masses are going to rush out and buy DVDs in droves again. That may happen short-term, but long-term this is just about the dumbest thing they could have done. They might as well scream out “Please pirate our movies for the next four weeks, before you rent them cheaply and we make any kind of money.” The fundamental problem with DVD sales isn’t cheap rentals, it’s that the majority of movies aren’t worth owning. And to be honest, they never were. There are a handful of truly great films made every year that you want to watch over and over again. But most are crap, or at the very least, disposable.
Hollywood has skated along for years selling these crap movies, but with the rise of mail, kiosk, and online rental systems, the truth has been revealed: No one wants to own these movies. Hollywood thinks it can put Humpty Dumpty back together again with this 28-day crap, but they can’t.
And they’re going to learn that the hard way, apparently. When piracy starts to rise, they’ll undoubtedly blame everyone but themselves. Then when they can’t control it, they’ll turn to someone, just like the music industry did with iTunes, that helps them but takes away all their leverage. Maybe that will even be Netflix.
Ted Sarandos, the chief content officer for Netflix, calls this deal a “win-win all around.” That’s not true. Here’s what it really is: Short-term, it’s a win for Hollywood and a lose for Netflix. Long-term, it’s a win for Netflix and a lose for Hollywood. But the real problem? For the consumers it’s an absolute lose-lose. And I would have thought Netflix would have been better than to give us that.
Update: In a bit of perfect timing, a post entitled “Why Netflix’s Long-Term Focus in New Warner Bros. Deal is a Win for Everyone” has just hit Techmeme. I can respond to this very simply. Here’s their key argument:
If Netflix is right, and it can sign on additional studios to similar deals, then ultimately consumers will win. That’s because, as Netflix proves in the value of streaming, it will be able to offer improved terms to studios, resulting in Netflix getting better and better access to films. But this will be a gradual process that unfolds over time. Whereas consumers always “want everything yesterday,” the reality is that if Hollywood and Netflix can avoid disruption and instead preserve most of their economics by gracefully transitioning their businesses to digital delivery, consumers stand a better chance of continuing to receive the kind of premium-quality (i.e. expensive to produce) films they value. The demise of the newspaper industry is a cautionary example of what happens when disruption instead prevails and an industry’s traditional economics are destroyed.
The problem here is that the assumption is that Hollywood will be ready and willing to favorably deal with Netflix in the future for streaming. Mark my words, that will only happen if and when piracy becomes a problem. Do we really believe that Hollywood wants to give Netflix (or anyone else) movies to stream early rather than having people buy them first? No, it’s the exact same problem. It’s a problem of greed.
VideoNuze is giving Hollywood way too much credit in believing they are doing this thinking towards the future. They are doing this thinking towards their wallets.
Update 2: From the New York Times:
He said that Netflix was willing to compromise on the issue because “our number one objective now is expanding the digital catalog.” Netflix’s streaming service won’t receive any newer movies from Warner – “it’s not that much of a breakthrough,” Mr. Hastings said – but it will get a larger piece of the Warner back catalog.
Bolding is mine. But there you go. No newer movies. As I said, this is garbage.
Update 3: VideoNuze responds to my response:
I think Siegler is wrong on both counts, and many of TechCrunch’s readers commenting on the post do as well. First, nobody in Hollywood believes DVD sales are going to spike because of deals like this. However, they do believe that any little bit that can be done to preserve the appeal of DVD’s initial sale window can only help DVD sales which are critical to Hollywood’s economics. Everyone knows DVD is a dying business; the new window is intended to help it die more gracefully. And because new releases are not that critical to many Netflix users anyway, Netflix has in reality given up little, but presumably gotten a lot, with improved access for streaming and lower DVD purchase prices.
Again, bolding mine. Die gracefully, interesting way to put it. And one hell of a stupid business model. And I’m not sure how don’t you consider 30% to be “many” Netflix users. We’re talking millions of people. Did I mention Netflix is getting no newer release films to stream under the deal? I’m not arguing that it’s a bad business decision for Netflix, I’m arguing that it’s awful for the Netflix customers.
[image: Warner Brothers – the irony is not lost on me]