We Americans love a good David vs Goliath battle, but in our hearts we love a good Goliath vs Goliath battle better. So let’s look a few years into the future when old media and new media meet their Waterloo.
Okay, Netflix isn’t really new media. It’s a DVD rental company that hit on a formula to take down Blockbuster. But Netflix’s fearless leader, Reed Hastings, sees the future in streaming movies onto your flat screen TV. His company is pretty persistent in building the streaming service. Netflix, along with Amazon.com forms the backbone of MovieWithMe.com filtering service since we only review films that are available on these two sites.
We like that Netflix is persistent about the customer experience. If you are a subscriber, you’ll occasionally receive an email after yo’ve viewed a film on your big screen asking “how was the picture quality?” I can’t think of any cable company that has every cared about my picture quality.
Netflix qualifies as a new media player not only because of its emphasis on streaming, but because it is snapping up old media content. The recent billion dollar deal with Epix (MGM, Paramount, Lion’s Gate Films) shows how serious they are. Their next salvo will be to acquire more, and more recent, TV shows.
Inevitably this will lead them to HBO, a Time Warner division that has produced some of the best TV content (and represents about 25% of T-W operating profit). HBO is only available on cable/satellite. You pay about $26 to subscribe to a premium tier that includes HBO and T-W collects about seven dollars for every subscriber.
That’s great but it has its limits. About 41 million of the 90 million viewers in America pay for HBO/Cinemx. It took HBO forty years to reach that figure. Netflix has about 19 million subscribers and it took twelve years. At that rate, they’ll catch up to HBO within the decade, if not sooner. When they do, things will get interesting.
Currently restricting HBO/Cinemax’s audience to premium cable and satellite subscribers is leaving a lot of money on the table. More disturbing, the business model of cable/satellite depends on tier pricing in an era that has already evolved to a la carte pricing (iTunes, Amazon.com). Could HBO make a lot more money offering premiere programming to Netflix, iTunes and Amazon at the same time as cable satellite subscribers? Estimates are they could make three-quarters of a billion dollars more.
What’s holding them back is their exclusive contract with cable/satellite. Looking for some wiggle room in those contracts, Jeff Bewkes, head of Time-Warner, has announced HBO GO, a screwy idea that allows you to see HBO on your computer but only if you already subscribe to HBO via cable/satellite. I think he’s smart enough to push this idea because he knows it will fail. Then he can call his cable buddies and say, “see, I told you.”
The obvious answer is for HBO to free itself from cable’s walled garden. Estimates are that HBO/Cinemax will lose 1.5 million cable/satellite subscribers this year. The hot topic at cable conventions is “cord cutting.” That’s the industry phrase for subscribers who cancel their subscriptions after deciding they’ve paid long enough for channels they don’t want, service they hate, and providers that shut off favorite channels in negotiation disputes with content companies (like Cablevision vs Fox).
What if Netflix made Time-Warner an offer for HBO they couldn’t refuse? Netflix has the cash, the clout, and the growth. Could T-W stockholders refuse? Seem outlandish? It was just ten years ago that AOL purchased T-W for 164 billion dollars and the stockholders (at first) loved that deal. That one didn’t work out so well, but this deal would be different. Netflix’s objective is only access to HBO programming, not buying the entire company. Netflix wants content for cash. That has a nice ring to it.