March 29, 2012

Memo to Hollywood, Netflix is Your Friend

Netflix's subscriber count took a hit after poor pricing restructuring and resistance from content providers unwilling to negotiate licensing deals, but new data suggests the streaming company is poised for a comeback.

The Los Gatos, Calif.-based company endured a bit of a rocky road in 2011 after hitting an all-time high in subscribers. Failure to renegotiate its deal for Showtime's programming and being snubbed completely by HBO led to a loss of 800,000 subscribers in less than three months, leaving the company reeling as it faced questions about the future.

After Netflix tried to change the prices of its subscription fees, which led to angry customers and criticism from the media, the company's stock plummeted and it issued an apology to subscribers and shareholders. Still, Netflix finished the year strong, adding more than 600,000 subscribers in the fourth quarter of 2011, and as the company faces an uphill battle against studios and other content providers, there is some reason to think it stands a fighting chance.

Online Outpacing DVD

It's clear people love to watch their movies online. The amount of movies viewed through the web via online stores or streaming services like Netflix is set to grow 135 percent this year, according to IHS Screen Digest, accounting for 57 percent of all movie consumption in 2012. Ultimately, studios want their films where they will capture the most eyeballs and dollars, but unfortunately, the two aren't one and the same.

Research shows consumers will spend just under $2 billion watching movies digitally this year, while DVD and Blu-ray sales are expected to net $11 billion. This great disparity in revenue has studios determined to keep new release films away from outlets like Netflix, despite users' incredible interest in the "all you can eat" service.

The figures stack up against Netflix when it comes to customers' distribution of their cash, but the size of the audience the service attracts means there is potential to make money. If Netflix continues to grow and physical media sales continue to decline, the balance of power could shift enough to force studios to come to the table and begin discussions with the company it once considered its worst nightmare.

Netflix Gains a Bargaining Chip

For networks and cable channels, negotiating licensing deals with Netflix for shows may have originally seemed like a no-win situation. Offering old seasons of television shows on Netflix means subscribers have little reason to buy DVD box sets of backlogged seasons. But the business of television works differently from the movies and it is beginning to work in Netflix's favor.

While easy access to old seasons of shows like "How I Met Your Mother" may mean studios miss out on DVD sales, it also means there is a high number of people who are able to watch them, leading to a bounce in ratings for many shows. When the sitcom returned last fall for its first season since it became available on Netflix, its ratings were higher than before. A development like that is unheard of for a show in it seventh year on-air, but its availability on Netflix, along with syndication on other stations, allowed those who wanted to catch up on the series a perfect opportunity to do so.

This past week, the performance of How I Met Your Mother in the Nielsen ratings proved more than just a blip on the radar. AMC Networks' series "Mad Men" debuted its first season since becoming available on Netflix and its premiere was 20 percent higher than the year before.

Netflix's ability to increase the ratings of shows that have been on for years makes it much more attractive for studios to strike licensing deals with the company. A show with higher ratings makes the program much more valuable to networks, putting more money into studios' pockets.

Back in the Game

Though the numbers don't scream a Netflix takeover is coming, they are beginning to tilt in a way that appears favorable for the online streamer. Studios still likely see Netflix as the service that killed their cash cow named DVD, but they may want to begin taking a little less-antagonistic look at the company.

Netflix is not raking in the money for studios the way DVDs once did, but the number of people flocking to it and similar services is going up, while the number of people buying movies at their local retailers is falling.

Consumers' rising interest in watching movies online makes it clear that studios will not be able to cling to DVD and Blu-ray sales forever. At some point they'll at least have to consider the question, "Is Netflix the answer?" ♦

Categories: Media Mind