Think Netflix Sucks? Blame Cable

Despite the rise of online streaming services, the cable industry still holds the edge when it comes to getting new movie releases first. The competition for top movie releases is heated enough that channels often pay eight-figure sums for the first cable broadcast rights of blockbuster movies. Cable outlet FX, for example, spent $22 million for rights to broadcast "Iron Man" on its network, snapping up the comic book-inspired blockbuster before its theatrical run wrapped.

More recently, FX paid top dollar to buy up first TV broadcast rights for current summer releases like "Prometheus," "Snow White and the Huntsman," "The Dictator," "Battleship" and "Madagascar 3" before their theatrical runs ended. In fact, FX acquired basic cable broadcast rights for 28 of the 50 highest-grossing movies of 2011, guaranteeing their exclusivity to the network for a protracted period.

Why the Shopping Spree?

Cable channels have always spent heavily on premium content, trying to command top rates from advertisers and bring value to the often expensive cable subscriptions consumers pay. But the jaw-dropping sums spent by cablers to ramp up on this advantage come at a point of transition in the basic pay-TV industry, as subscriber rates mature and even stagnate and more consumers "cut the cord," dropping pricey subscription packages in favor of online streaming services like Netflix and Hulu.

Last year, industry analysis discovered pay-TV television viewing dropped to 69 percent, down from 72 percent in 2009, according to a study by ABI Research, with online TV and video-on-demand services often replacing cable TV subscriptions for subscribers.

In light of flagging cable viewing, channels and networks are pushing to stay competitive. Original shows have been one successful strategy for basic cable channels to stay relevant, with networks like AMC finding great acclaim and success with shows like "Mad Men," "The Walking Dead" and "Breaking Bad."

But re-broadcasting movies can fill a valuable role for cable channels looking to round out their content offerings, and as a result, basic pay-TV networks are gobbling up more movies than ever to fill their schedules. Nearly 10,000 unique English-language movies aired last year on basic cable networks, according to consulting firm IHS's study, accounting for 13.5 percent of total television air time of the 79 basic cable networks included in the study. Instead of older titles, however, cable networks are increasingly jockeying for newer releases that once would've gone to premium cable outlets like HBO, and are willing to pay high prices for the advantage.

The figures are eye-popping, but it's an investment that can pay off for cable channels. FX, for example, has seen income grow from just $280 million in 2006 to $461 million in 2011, fueled by skyrocketing advertising profit.

"When you look at the ramp-up of ad revenue for FX, as they've increased their movie content, they've also increased their ad revenue," said Erik Brannon, analyst at consulting firm IHS, to paidContent.

As a result of robust content offerings, cable channels are ensuring that cable packages keep their high value. Many subscribers continue to pay up to more than $100 a month to have access the hottest movies, and advertisers pay high ad rates to reach these premium subscribers. Cable companies win on either end, with subscribers perceiving the high value of their service subscription and ad revenue continuing to roll in.

Out of Netflix's Long Reach

There's no shortage of premium movie content coming to basic cable, but with channels and networks willing to pay exorbitant high sums for new releases, they may be pricing it out of reach for streaming services like Amazon and Netflix. That's something Hollywood would like very much, especially as these services continue to gain ground with consumers.

In the industry's perspective, Netflix was originally a place where older movies and TV shows went to gather dust. Initially the Los Gatos, Calif.-based service focused on beefing up its library of older content, buying the rights to digitally stream Starz' entire catalog of movies, for example. Hollywood power players were happy to sell these movies for a relatively low price to Netflix, since they regarded streaming as a low-value outlet for their properties.

But a funny thing happened that studios didn't expect: online streaming became hugely popular. Netflix kept accruing more subscribers, building its broad base. Surging revenues powered higher-profile content acquisitions, and slowly the smaller upstart emerged as a formidable competitor, especially as more consumers stopped buying DVDs, downloaded movie torrents and shifted to video streaming when possible.

Looking to lessen its dependence on other companies' content and develop itself as a studio in its own right, the streaming service is now branching off into offering exclusively developed content, such as original series like the well-regarded "Lilyhammer" and future releases like a new season of cult comedy "Arrested Development."

Now, according to IHS in a study published earlier this month, Netflix is the nation's leading supplier of movies streamed over the Internet, zooming past Apple in 2011 to take the top spot. Despite recent troubles over splitting its DVD-by-mail and streaming business and alienating its customers, Netflix remains strong enough to compete now for increasingly premium content.

But as cable networks fight even harder to win newer movies, the industry is likely breathing a sigh of relief that pay-TV, long a friendly bedfellow to studios, remains one of the most lucrative outlets for material -- and with movies that consumers are actually dying to see on smaller screens, cable remains highly competitive against upstarts like Netflix.

Cable Keeps Relevant, Hollywood Fights Back

The truth is, cable has been fighting to stay relevant and justify high subscription costs for some time now. Last year, in a move to keep up with increasingly mobile viewers, pay-TV entities ramped up streaming apps, though some hit legal snags over whether they violated digital rights. HBO, for example, offers its own streaming service, HBO Go, for online viewing. These benefits can only be accessed by subscribers, making a monthly cable bill still a necessity for many entertainment fans.

The high prices cable pays for premium content also insures a longer window of exclusivity. "Windowing," the sequential rollout of movies on various platforms, has long been an important practice in the industry for creating and retaining value for content, despite its latent effects on worldwide piracy. Paying high prices for valuable TV broadcast windows closer to a movie's theatrical release, when consumers' interest in a film is highest, likely guarantees a longer period of exclusivity -- which means it will stay exclusive to cable longer, and reach streaming services more slowly.

Of course, some studios are altogether refusing to allow material to be streamed on services like Netflix and Hulu. HBO has long disavowed selling the rights to its popular acclaimed shows to outside services, ensuring its own apps and streaming sites keep high interest and value.

Many in the tech industry consider an older business like TV and movies well behind the pace of innovation when it comes to new media developments. Hollywood's short-sightedness with Netflix and streaming in general still has the industry reeling from the shift in power dynamics, and it has yet to come up with a compelling answer and solution to the rampant piracy that saps it of lost revenue every year.

But money never goes out of style, and with cable spending more than ever on premium content, the high sums ensure that business will stay as usual, even in the midst of increasingly turbulent changes. ♦

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