Is Netflix a Friend or Foe?

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Entertainment companies have no choice. When it comes to Netflix (Nasdaq: NFLX  ) , content creators and distributors have to speak from both sides of their mouths.

News Corp. (Nasdaq: NWSA  ) COO Chase Carey found it fit to both praise and bash Netflix during last night's conference call.

On the one hand, Carey points out that News Corp. stands to cash in nicely from Netflix's growing commitment to pay up for streaming content to satisfy its growing subscriber base. This is, after all, the home of both the FOX television channel and the 20th Century Fox movie studio.

"I think for content owners having players like Netflix emerge has real positives to it," Carey said. "They're another buyer of our product."

However, it's not merely an incremental jackpot.

Modern problems
The analyst prodding Carey's comments singled out last month's response by Time Warner's (NYSE: TWX  ) Turner Broadcasting's decision to pull out of the bidding for syndicating Modern Family reruns because it was overly exposed in cyberspace.

The show airs on both Disney's (NYSE: DIS  ) and is a popular stream on Hulu. Disney and show producer 20th Century Fox may have been approaching ad-supported streams as additional revenue channels, but the process clearly lost the show an important bidder in the syndication market.

Carey defended Turner's argument.

"A channel's right to say: If I'm going to pay a lot of money for Modern Family I want to buy enough rights so that it's not showing up on a competing platform," Carey said. "I would not be buying syndication rights to an expensive piece of programming and let it reside on Netflix for 20 million homes."

Seeing Starz
Companies need to adjust their content's value lower if they're selling digital access, so they shouldn't be selling shows and movies on the cheap. He singled out Liberty Starz (Nasdaq: LSTZA  ) as a company that sold itself cheap to Netflix.

It's not a fair knock. Starz was the first major content provider to ink a deal with Netflix. Neither company could have imagined that more than half of the content consumed by Netflix's 20 million subscribers would be in streaming form right now. The deal comes up for renewal soon, and it's a forgone conclusion that Starz is going to ask for a lot more money this time around.

Ignore Netflix at your own peril
An important admission by Carey during last night's call is that studios have a bad habit of building walls around their content. Consumers will flock to the platforms that provide the most seamless experience, explaining why Netflix is merely months away from becoming the country's most popular premium entertainment provider.

Maybe it's just me, but I don't think that Hollywood is too happy with Netflix offering unlimited digital streams for $7.99 a month in the United States and Canada. This reminds me of record labels bellyaching about Apple (Nasdaq: AAPL  ) pricing song downloads at $0.99. The move upended the compact disc market, but it's not as if digital music would have worked at higher price points.

"Consumers are going to migrate to the services they like," Carey said during the call.

Well, they're choosing Netflix in droves. The flick flicker tacked on more than 7 million net subscriber additions last year. Could it have worked at a higher price point to make the studios happier?

I doubt it. Netflix at $30 a month would be lucky to have a few million couch potatoes on its rolls. It would never have been the mainstream phenomenon it is today.

Content creators don't have to like it, but it always seems to be the third parties distributors that succeed because they don't overvalue the worth of their content the way ego-stroking studios would.

Apple at $0.99 a song? Bah! Coinstar's (Nasdaq: CSTR  ) Redbox kiosks at $1 a night rental? No way! However, it's what ultimately works and the initial greed of content creators originally is what costs them control in the end.

Apple is the one calling the shots in the prerecorded music these days. It won't be long before Netflix is doing the same with video.

For the studios, Netflix can't be anything less than a friend, but a friend that needs to be both respected and feared.

Have studios already yielded control to Netflix? Share your thoughts in the comment box below.

Walt Disney is a Motley Fool Inside Value pick. Apple, Walt Disney, and Netflix are Motley Fool Stock Advisor recommendations. The Fool has written puts on Apple. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He also owns shares in Disney. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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  • Report this Comment On February 03, 2011, at 12:13 PM, Pandorabelle wrote:

    Netflix is neither friend nor foe; it is a FRAUD with NO MONEY to pay for additional content. The massive company buybacks and subsequent selling stampede by Reed Hastings and other inside execs has left NFLX cash-poor.

    They are treading water while regrouping to offer a secondary.

    Consider how many people decide against subscribing:

    For every 2 people who sign up for NFLX, MORE than 1 will CANCEL.

    So for the current 20 million subscribers, about 20 million have already tried an cancelled.

    NFLX CHURN Data:

    Table 3: Changes in NFLX Subscribers:

    Date Period End Total Subscribers (Millions) Net increase in Subscribers (Millions) New Subscribers (Millions) Lost Subscribers (Millions) Lost / New (%)

    9/30/2007 7.0 1.3

    12/31/2007 7.5 0.5 1.5 1.0 69.8%

    3/31/2008 8.2 0.8 1.9 1.1 59.0%

    6/30/2008 8.4 0.2 2.2 2.0 92.2%

    9/30/2008 8.7 0.3 1.5 1.3 82.9%

    12/31/2008 9.4 0.7 1.2 0.5 41.3%

    3/31/2009 10.3 0.9 2.4 1.5 61.9%

    6/30/2009 10.6 0.3 1.9 1.6 85.1%

    9/30/2009 11.1 0.5 2.3 1.8 77.7%

    12/31/2009 12.3 1.2 2.8 1.6 58.6%

    3/31/2010 14.0 1.7 3.5 1.8 51.3%

    6/30/2010 15.0 1.0 3.1 2.0 66.2%

    9/30/2010 16.9 1.9 4.1 2.2 52.9%

    Data is from calculated NFLX 10-Q filings which provide acquisition cost, marketing expense, subscribers and subscribers at period end.

    AMZN is just the first of several big competitors on the horizon. Friend or foe? Irrelevant when cash is king.

    One more thought....with all the streaming options that will be available...wouldn't the TV makers be SMARTER to offer a "Streaming" button...than a red button to a specific company that may not survive?

    Foresight is a beautiful thing....

  • Report this Comment On February 03, 2011, at 12:29 PM, MKArch wrote:

    You have to be kidding me, content providers need to guarantee lost margin on their bread and butter customers to bow down to a glorifed middle man? Who can't replicate what NFLX does including the content providers if they chose to? Other than suckering providers into a one time deal for almost nothing and temporarily getting a cheap ride on the MSO's pipes what has NFLX accomplished that can't be repeated or undone?

  • Report this Comment On February 04, 2011, at 11:08 AM, griffjj wrote:

    One thing I can count on with near 100% certainty: Rick will use the term "flick flicker" in an article about Netflix.

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