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A curious reader recently emailed me to ask about Netflix (Nasdaq: NFLX ) and its content library. He's a happy Netflix user, but was turned off when he found out that titles in his streaming queue didn't necessarily stick around forever. "Is the apparently ephemeral nature of instant viewing rights risky to Netflix given its stated desire to go all-streaming in the future?" was his final query.
Like walking in water
The fleeting form of those streaming licenses makes a ton of sense in today's entertainment industry. You don't expect HBO to have the rights for any movie it didn't produce in-house forever and ever, for example.
Movie theaters can only hang on to Avatar and the next Twilight installment for a few weeks before passing the baton to the DVD and premium cable windows. And so it goes; no studio wants to sign permanent licenses for anything. That's just not the way it works.
This is why some pundits want Netflix to buy Starz off Liberty Media (Nasdaq: LSTZA ) right now. Netflix currently pays a minuscule $30 million a year for the right to stream movies from Sony (NYSE: SNE ) Pictures and Walt Disney (Nasdaq: DIS ) . That license could become a costly $300 million a year when it's renegotiated -- maybe even more. Why not simply buy the cable channel, thus securing fixed-cost access to those studios forevermore?
Alas, it wouldn't really work. Netflix would be buying a middleman operation, which itself has to work out long-term rights to that content with its backing studios. Starz' contracts with Sony, Disney, and a handful of smaller studios expire between 2012 and 2016. Moreover, Starz pays license fees to the studios for these rights. It wouldn't make any economic sense for Netflix to shoulder those payments in return for ... four years or less of guaranteed fees.
In a perfectly digitized world, Netflix would operate like a library where every title is always resting on the shelf. Once a title entered the vault, it would never leave. Consumers would certainly love this, and the company would surely make permanence a major selling point in its marketing.
But we're not there yet, and we may never get there at all. The established system of time-limited content licenses is deeply embedded in Hollywood, and it's a large component of how the studios expect to do business. Moving from celluloid to bits and bytes doesn't change that expectation; it only stretches out the addressable market on a global scale.
A change is gonna come
Digital video is still a pretty new phenomenon in the movie industry. That ridiculously affordable Starz agreement shows how Netflix took everyone by surprise when its streaming operations exploded over the past couple of years. The billion-dollar Epix deal is more in line with the current climate, and future deals will surely be even more expensive. Everyone is setting new standards as they go along.
So we Netflix users are stuck with disappearing titles until someone figures out how to make eternal licenses palatable to an industry that hates the very idea. Netflix doesn't do late fees, but I suppose this expiration issue is the closest thing we get.
Is this scaring away would-be subscribers? I highly doubt it, at least as long as DVD mailings are a large part of the picture. Would you jump ship on a service you enjoy because a free add-on didn't keep a favorite title (or a handful) around forever?
The long-term solution
In the long run, Netflix needs to go around the whole man-in-the-middle tier and start striking distribution deals directly with the studios. Early efforts have created bonds to small-time movie houses Relativity Media and Nu Media, but the company won't stop there.
I'd be flabbergasted if Netflix didn't sign its first streaming contract with a second-tier studio such as Lions Gate Entertainment (NYSE: LGF ) or privately held DreamWorks SKG this year. The time has come to take that step. After that, the larger dominoes will start to fall, until all of Hollywood has struck short-term and very expensive licensing deals with Netflix, including Disney, Sony, and Time Warner's (NYSE: TWX ) Warner Bros.
The existing Starz and Epix agreements give Netflix exclusive rights to those digital libraries, which is why you can't find Starz-handled titles like When In Rome on the Amazon.com (Nasdaq: AMZN ) On Demand service, for instance. Given the five-year terms of the Epix deal, I'd give the last Hollywood holdout until 2015 to sign up. Dropping the exclusivity clause could make these deals more affordable, and possibly longer-lasting as well, though that opens a whole new can of competitive worms. But with a head start like the one Netflix has built, I think it's worth it.
So in short, permanent content licenses are a rarity in the movie industry, and change takes time. Netflix is navigating these uncharted waters better than anyone expected, and I think most subscribers are OK with the results. Thanks for asking.