Hollywood wants share of Netflix's windfall
Netflix CEO Reed Hastings says Hollywood is pondering whether to create a sales-only period that would prevent rental stores from distributing some films. He says that could be good for his company.
(Credit: Greg Sandoval/CNET)At this point, who could begrudge Reed Hastings and his Netflix management team from some celebration, from performing the corporate equivalent of an end-zone dance?
Wall Street and Netflix subscribers appear overjoyed with the direction that Netflix's CEO has the Web's top video-rental store pointed in. The only people who don't seem pleased with Netflix's success work in Hollywood.
Just days before Netflix reported third-quarter earnings that jumped 48 percent from a year ago and subscriber growth of 28 percent during the same period, two executives from different studios told me they aren't getting their fair share.
"The thing with Netflix is that people are taking notice that they keep reporting these big quarters," said one studio exec. "We aren't participating in that and that's going to change."
Another entertainment executive told me Netflix contributes less to the studios' bottom line than other distribution modes, such as DVD sales. In addition, Netflix and other digital rental stores, including iTunes, may also be luring customers away from these more profitable outlets. He said that the film industry is just like any other supplier--it wants to see the partners who pay most for its product fare the best.
The problem here, of course, is that Hollywood's best partners are ailing. DVD sales are in decline. Cable providers are seeing customers drop their subscriptions and turn to the Internet for entertainment. Theater revenues are up but that's due to rising ticket prices.The more important statistic is the number of moviegoers and that's shrinking, according to one of the studio execs.
As this Hollywood tearjerker plays out, Hastings and his Netflix crew continue to report knockout earnings. In addition, Apple CEO Steve Jobs is growing iTunes' video-rental business as well as its download-to-own sales, according to multiple studio sources.
In this environment "there's a lot of jockeying for position," said Tom Adams, the principle analyst and founder of Adams Media Research, a company that has provided market data to Hollywood for 25 years. "The studios don't love the rental market as much because the focus has always been on sales. They've had Wal-Mart and Target, stores that are willing to take slim margins for the traffic-generating capability that comes with selling DVDs."
Look at the situation from the eyes of a studio chief: Netflix charges $9 a month and that enables a subscriber to watch all the movie titles Netflix offers online. Compare that with the money the studios get when a consumer pays $14.95 for a single DVD.
The lords of tinsel town would be wise to keep an eye on Hastings. It was just a couple of years ago that many predicted the company he co-founded in 1997 would be crushed by digital-distribution services.
But Hastings is turning out to be the John Elway of digital entertainment. Like the famed former Denver Broncos quarterback, the Netflix CEO has a knack for executing better than competitors and leading his team out of jams. Plenty of pundits wrote not long ago that online-video services would eclipse Netflix's DVD mail-order business--with its profit-chomping warehouses, big postage costs, and inability to provide instant gratification. Customers who rent discs must wait until the mailman arrives to watch a movie.
But Elway engineered "The Drive" and Hastings' engineered the strategic partnerships with Microsoft's Xbox, Roku, LG, Sony and other set-top makers that enable Netflix users to watch streaming video on their TV sets.
Under Hastings' stewardship, Netflix has staked out prime turf. By bridging the so-called "last 10 feet" from the Web to the TV, Netflix promises users a viewing experience that rivals the one provided by traditional cable and broadcast stations. Apple can't do this (who owns an AppleTV?). Ad-supported Web video services, such as Hulu or YouTube, aren't hooked up to the TV yet in any important way.
As for Hollywood's concerns that Netflix is hurting more profitable outlets, there appears to be room for negotiation.
Hastings suggested during Netflix's third-quarter earnings call (PDF) on Thursday that he is willing to share more with the studios once more customers opt for streaming content, which will reduce the costs of shipping DVDs.
"In the long-term, as we license more and more content for streaming and as consumers use streaming more, that enormous and growing postal expense will start to flow to content owners and we will become one of the studios' and networks' largest customers," Hastings said. "The rate of evolution for this depends both on how much streaming content we can license and how many homes have a Netflix-ready device or enjoy watching video on a laptop."
Hastings appears to be sending Hollywood a message here by saying that Netflix's streaming service will help turn it into a much more profitable partner, provided the studios give the video store greater access to films and TV shows.
Adams said that Netflix has enjoyed a "grace period" with the studios because the success of Netflix's steaming service caught many in Hollywood by surprise. (Note: Adams credited Microsoft's Xbox with fueling much of the speedy growth and said that his research shows Xbox households are watching 17 hours of Netflix streaming content a month, a number he called "significant").
Adams said he thinks a deal will get done that benefits the studios and Netflix.
Maybe, but Hollywood has a history of going to war with companies like Netflix when negotiations don't go its way, according to Hastings.
"Occasionally, a studio tries to find ways to restrict a rental firm's ability to buy at retail," Hastings said during the earnings call on Thursday. "But retail is so big and diffuse, this strategy has never worked. Four years ago, Blockbuster, in an attempt to have an exclusive in rental, paid the Weinstein Company to block all purchases of their films by Netflix. This attempted blockade continues today but we've never had a problem buying Weinstein DVDs."
One thing to keep in mind is that the "blockade" he was talking about was for physical discs. Part of the reason why it wasn't successful is that as long as a video store can find someone to sell it a DVD the law allows them to do pretty much anything it wants with the disc.
This doesn't apply to streaming movies, however. To distribute films online, Netflix needs to reach an agreement with the studios. The studios could conceivably stifle the growth of Netflix's streaming business by holding back content.
Here's something else: Hastings said there's talk the studios may attempt to create a brief "sales-only" period. He didn't provide many details, but he also didn't sound too worried.
"If some studios choose to support a sales-only window and delay rental, it would shrink the rental market a bit, but it would grow sales revenue for those studios," Hastings said. "If we can agree on low enough pricing for delayed rental, it could potentially increase profits for everyone...A short sales-only window would be a benefit to DVD sales and therefore, to the health of the whole DVD ecosystem. Plus, it would allow us to spend less on discs and more on streaming content. "
What this means to me is that the studios may protect DVD sales while making Netflix even stronger in the rental sector. We've seen what Hastings can do when the odds are against him.
How do you think he will fare when he's out in front?
Note to readers: Forgive me for failing to include this YouTube clip about The Drive earlier (Warning to Browns' fans: this could hurt).
Greg Sandoval covers media and digital entertainment for CNET News. He is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at http://twitter.com/sandoCNET. 
It has nothing to do with pirates, and nothing to do with Netflix. They may go after Netflix, no doubt, but Netflix isn't that big, and can't save them.
The newspaper industry is the best example. Noone is pirating newspapers. Noone is making huge money.
But the being 'piracy free' can't save the newspaper industry. They don't have a newspaper rental service to blame.
It couldn't be more clear...the internet provides thousands upon thousands of varied sources for information, and newspapers had a model based on being the local monopoly.
The big movie studio's are just watching the entertainment biz also splinter into a thousand pieces, away from a few big houses, to literally tens of thousands of choices around the globe....but they do have piracy, and they do have Netflix, and they can be as confused as they want to be.
They could start with online distribution.
But, perhaps this should be the test of commitment. Let each of them put up funds and split the shares according to who puts up the most cash. They can then divide the profits accordingly.
Should they do that, though, they would have a lot of DVD rental companies up in arms and going out of business. So, suppose they risk it. They lose their valuable rental distribution business... so their own better do very well. But, what would they charge? $6/rental? No thanks.
It is rather frustrating to hear these companies complain when their customer (Netflix) profits. They did offer to sell the DVD for rental, right? Now they want DVD to pay per use or something? What kind of unethical business practice is that? Would it be any different if I manufactured hammers and then discovered my customer was using that hammer to build multi-million dollar homes? Should I have the right to demand additional fees for using the hammers I sold?
These media companies -- and I'm hard pressed to say which ones I could exclude -- are a bunch of snakes.
Ever read the "news" on the internet? Ever watch the "news" on TV? Where do you think most of this information comes from in the first place? It certainly isn't katie Couric and the networks, and you can absolutely bet it isn't one of the news aggregaetors like Google Yahoo, or even some lame blogger that reads the information others have created, writes some drivel (in most cases) and pretends he/she is creating value.
In almost every case, the "news" comes from reporters, most of which work for newspapers and print organizations. Almost all this is then "pirated" so some lame blogger can pretend to be "in the know" or the TV networks can sell advertising..
When they're gone (the newspapers), everything else is going to fall apart because there will be no one left to do the work, get the story, stop the corporate rip offs and malfeasance, or report when something goes right for a change (does that happen anymore?).
I wish the studios and friends would stop trying to protect the physical format. Let it ride it's course. People will still buy physical for sometime if you give them incentive to besides the fact. I know I like to have the physical case and any goodies included. Also, there are folks who can't or won't stream yet due to quality and connection issues. But please, stop trying to save physical media and just let it run it's course while offering streaming and easy access to rentals.
You really think because you can buy a song for 99 cents it makes one bit of difference to someone who pirates music?
Heck, there's plenty of russian sites out there where yo ucan buy a song for 10 cents (or less!) or a whole album for about $1, in high quality MP3....<shrug>
Since the people purchasing the movies are paying way more for them, I don't see any reason why they shouldn't get to watch them first. It would be "theater, sales, rentals". I have no problem with that model at all.
And, this may slightly increase DVD and Blu-ray sales. Fine with me....
Yes, it makes a difference if I can legally download a song for 99 cents. If the record companies had there way it would of course be $30 for the "convenience" and I would have to buy the whole album. I am happy to pay for individual songs or albums at a reasonable price. The record and movie companies aren't really interested in offering a reasonable price, they only see maximum price/profit short term and ignore the fact that they are destroying their own market.
http://www.frugalgadgets.com/amazon-mp3-daily-deal.php
or google gadgets like:
http://www.google.com/ig/adde?moduleurl=http://www.frugalgadgets.com/AmazonMP3DailyDeal/AmazonMP3DailyDeal.xml
You want more from NetFlix? Ok, do you ship for them? Do you assist with their logistics? Do you perform their payment processing? Do you help them to determine what is best for the viewer/customer? Do you in any way help them besides selling them a DVD that, in it's own nature is already ridiculously overpriced in itself? No? Then stop whining!
I for one am sick and tired of these old media stalwarts refusing to adapt; then instead of blaming their own sheer incompetence on poor sales, they blame the customers that pay them to begin with. What is up with that?! I see no reason why NetFlix should be punished for their own success, more power to them. At least they understand what customers want, and they've found the perfect way to provide it to us, at a value we can all live with. Suck it MPAA and antiquated studio heads..
Hollywood needs to focus on making BETTER movies and that doesn't just mean throwing more money at actors or directors or special effects.... If Hollywood isn't careful, they will repeat all the missteps that the record labels have been doing. Hollywood needs to back off and back way off NOW.
How does it make sense that a DVD and iTunes download of same movie are even close to same price? Download lacks physical backup, DRM locks it way more than a DVD is locked, quality is worse, downloads lack the extras and commentary tracks, and none of that even includes real world factors like the lack of product to produce and ship on trucks and sit on store shelves - all of which add to the price.
Sorry that you can't buy a beach house in Maui, Mr. Studio Exec... maybe you'll have to settle for a timeshare instead like the middling execs do?
One more thing to add. If you want us to go to theaters and see movies. Stop charging $11 for 90 minutes of fluff. Either cut the price or make better movies. I use Netflix to watch movies that I could not justify seeing in the theaters.
Given the quality of the movies Hollywoods puts out these days, it's amazing anyone even goes to the theaters. If not for Netflix, I wouldn't watch half the crap out there. Netflix's pay-one-price model lets me see movies I would normally not bother to watch. Now that may seem like a losing proposition for the studios but at least they're getting face-time they would not otherwise get. And yet they complain.
Maybe the time has come for studios to reconsider their financial model - how much they pay big name stars, how they advertise and promote movies, and where they spend their production bucks. Mega dollar special effects blockbuster movies that no one cares to see are pointless. Adjust or go the way of the do-do.
"I created a LLC, I legally bought a DVD, I stuck that DVD in a little red sleeve with a bar code, I set up a web site, I advertized, and I rented the movie. Now I'm gonna keep all the profits."
What next, will the failing news companies say libraries can't have newspapers? Will publishers say libraries need to pay more for books, and limit when they can be loaned?
But you're right, lets shut down all the streaming movie sites, and let Hollywood open their own site. This way, if you want to stream a movie you HAVE to get it from the Hollywood site.
That's what you want, right?
Of course, a better idea would just be to have Netflix charge a little more, so that Hollywood makes the same amount of profit from the rentals as they do from other sources. Even Netflix agrees that they have room to offer Hollywood a little more profit here.
And, last I checked, all my favorite movies were made by Hollywood. Sure, they screw things up pretty good sometimes, but generally they do a good job. Of course, if you want you can always sit down and watch a few good Bollywood movies. Wouldn't that be a treat!
Read up on the netflix plans. The minimum plan (last time I checked) had a cap of 4 a month. Other plans are unlimited per month, but realisticly you can only turn a move around so fast because of mail time. I'm on the 2 at a time plan and turn them around about once a week..
This by the way is akin to data caps. Your data plan has a speed. The speed has a built in cap. You can't download more than your pipes will allow. However some like to cap that at less than the already built in limit (like the 4 per month plan).
Copying other compaies business model is considered "IP" intellectual Property.
You copy that without permission and you will have a class action lawsuit.
This just means that Hollywood's strong arm policies are TOTAL FAIL
Has anyone tried buying netflix videos using those instant credit cards at the checkout lanes?
I would use netflix myself if those throw away credit cards were of any real use.
The thing with Netflix is that people are taking notice that they keep reporting these big quarters," said one studio exec. "We aren't participating in that and that's going to change."
This reeks of entitlement. First hollywood was asleep at the wheel and didn't embrace/invent an internet based biz model for selling music or movies. then they complained bitterly when napster and others took hold, all they did was sue their customers! apple showed them a profitable biz model around music and TV content. now they blame youtube and netflix but where have they taken the lead in innovating? even studious like sony who owned the end to end ecosystem (i.e. content + devices like TV, devices like mp3 players, PSPs and other handhelds) couldnt do jack. If you notice stuff only when they "report big quarters" shame on you - just as we the individual investors in these stocks miss the massive upside if we miss the trend, they as biz will lose the oppty, they need to suck it up and compete or cooperate.
Don't succumb to their greed, NetFlix.
Netflix charges way to little for an all-you-can-eat movie buffet. I don't see why, if Netflix is making a killing, Hollywood shouldn't share in the profits. After all, Netflix doesn't make the movies.
Da Worfster
I was mailed a nasty-gram from my ISP after my first month of Netflix streaming use, threatening to increase my bill, how my usage is "stealing" bandwidth from neighbors, and the rest of the old stock excuses. With that ridiculous cap, I simply can't use the service very much at all.
You should be calling the ISP out by name. I would also send a letter of complaint to the FCC.
Sunshine is the best disinfectant. Only when these practices are brought out into the light of day can the appropriate steps be taken prevent this sort of thug-like action.
Cableone has a data cap. They throttle your connection if you hit it until the next month. Or that's the way I understand it. I've yet to see tools available for 'data flow through' to know where I am on their cap.
Of course DVD's are infinetly cheaper and easier to distribute then VHS. But it seems like this wouldnt benefit anyone...except pirates. That is the biggest part of the reason that most studios have gone to such a narrow distribution window. Widening that window would only make increasingly higher quality bootleg more readily available...most like resulting in masters hitting the streets WAY Before the DVD.
But I agree, most of the movies they're putting out right now are some what if not mostly terrible, TRANSFORMERS: ROTF anyone?
But then again any movie I would want is not likely to have been produced by a Hollywood studio anyway...
What they most likely will do is shoot themselves in the foot by restricting the licensing of streaming content to Netflix. The management in Hollywood is probably determined to be as stupid as the music industry, and we all know how well that has turned out for them.
Personally I would have no problem with people purchasing the movies getting them for a two week or one month period before they're available for rental, after all they're paying more for the movies.
The content is copyrighted. They own the copyright, but that's different than owning the work the same way we own our computers. Copyright is subject to fair use. If rental is fair use it's an empty threat. Hasn't this issue been to court already?
Now they want to complain that Netflix is succeeding and not giving Hollywood more cash? Last I heard the first sale doctrine allows someone who legally purchased a DVD to lend it to other people (as long as they aren't copying the DVDs or somesuch).
Basically, Hollywood is complaining that other companies are finding ways for people to avoid buying a DVD they will only watch once.
What is the problem here?
Why don't you send all of these comments to the execs that made the comments in the article? In you note to them, tell them that these comments are coming from customers willing to spend money but are tired of the Hollywood attitude.
Just as directors have become creative in determining how to get that special affect to occur, technology is allowing the creativity of anyone to create similar special affects. Before you know it, there won't be a need for a "movie industry". Johnny, who is 20 and in college, is spending every moment he can to produce a digital movie and knows how to use the social networks to market his creation. He will then release it to those theatres that can handle digital downloads from his website he has created. On top of that, he has inked a licensing deal with Netflix. Now, Johnny is 24, graduated from college and is living a modest lifestyle because of his college creation. Sure, he doesn't have houses throughout the world or 5 Bentley's and a big mansion, but he has his education paid for and a nice house, at 24.
- by usarioclave1 October 26, 2009 8:31 AM PDT
- "We want our fair share" means "we want more of someone else's money."
- Like this Reply to this comment
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- by Mergatroid Mania October 26, 2009 11:38 AM PDT
- You forgot to mention it's actually "we want more of someone else's money for renting our product."
- Like this
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- by Renegade Knight October 26, 2009 11:49 AM PDT
- @Mergatroid Mania
- Like this
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- by clsmithj October 26, 2009 3:30 PM PDT
- @Meratroid Mania,
- Like this
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Showing 1 of 3 pages (86 Comments)I think the $7 Netflix charges is a little low. No wonder they're making so much. And, no wonder there are so many negative comments from Netflix users. They know they're getting a better deal then they should be, and they don't want to lose it.
$7 is actually quite ridiculous for all the movies you want for a month.
7 bucks is Netflix's call. Not Hollywood's. Now if the Hollywood types want to start HollyFlix and do it themselves they can compete drectly and set whatever price they want and consumers will either sign on in droves or avoid it like the plague depending on what HollyFlix does for price and service.
However it's easier to point fingers and complain that the money they are making (and they are making money on the deal) isn't enough. That's their call as well.
did the movie studio dispatch you here to try and discourage Netflix users from liking their service.
From your comments it sure does sound that way.