Netflix buys the rights to stream other networks' shows, but will it ever return the favor with its critically acclaimed drama House of Cards? Source: Netflix.
Although corporate strategy can be inherently complicated, the simple rules are often the most effective. Perhaps one of the first rules you learn in any competitive endeavor, whether it be sports, debate, or chess, is "Don't beat yourself." Simply put, don't engage in a course of action that makes it easier for your counterpart to establish an advantage. While it's great advice, it isn't always followed.
For perhaps one of the best examples of the following phenomenon over the past five years, it's the growth of Netflix (NFLX -1.31%) to the detriment of the entire subscription-TV industry. On one hand, the company has grown its streaming-based subscribers to 69 million, 43 million domestically, while the numbers of cable subscribers continue to shrink, posting its first year-on-year loss in 2013 and continuing the trend based on data from SNL Kagan.
The interesting thing here is that Netflix's growth is somewhat fueled on the content from these networks, essentially beating them, in part, with their own content. Well, finally the cable networks are taking the lesson to heart, because there appears to be a rethinking of the relationship with Netflix, according to an article from Re/code. Will these networks "ghost" Netflix and stop selling it the rights to broadcast their shows?
Don't undercut yourself
In the article, three large network CEOs appear cautious in regard to selling their shows to Netflix. Perhaps the most detailed was Time Warner's (TWX) Jeff Bewkes, which stated that the company didn't want to undercut itself "by having somebody else pay a fraction of the cost and create a better inventory on the various shows you yourself created."
And that makes sense for Time Warner. Throughout the first six months of the year, Netflix reported $2.9 billion in streaming-based revenue versus Time Warner's Turner division of cable assets that reported $2.7 billion in subscription-based revenues in the same period.
For Netflix to be able to buy the best shows from its host of networks (TBS, TNT, TruTV, TCM, and Cartoon Network, among others), the original owner of the content, and then make money from these shows from users looking to abandon cable, seems to epitome of beating yourself in the long term to report short-term revenue gains.
If so, will this matter to Netflix?
You can't say Netflix is resting on its laurels. More recently, the company has worked feverishly to develop its original content. After starting with comedy specials and documentaries, Netflix has its first critically acclaimed hit with House of Cards. More recently, the company has picked up its pace in regard to programming with 60 premieres spanning comedy and drama series, standup specials, and three films, including Beasts of No Nation.
A well-executed content embargo would have been highly effective a few years ago. It's not a few years ago. Source: Netflix.
In the event a large contingent of cable networks all decide the short-term boost to revenue is no longer worth the risk of promoting possible cord-cutters, and there's no reason to think all will, then Netflix will need to lean on its original programming to keep users renewing those monthly memberships. A content boycott would have been devastating just two or three years ago, but now it seems to be less of a threat to Netflix.
The interesting thing is these networks have not turned the tables on Netflix. Can we look forward to Unbreakable Kimmy Schmidt or a heavily sanitized version of Orange Is the New Black (like Time Warner-owned HBO's Sex in the City was) on TBS? Probably not, and that's because Reed Hastings is not going to beat himself.
