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Does Hollywood Hate Netflix?

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By DavisFreeberg
February 15, 2006

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With all of the VOD deals that we see going on, I can't help but wonder if Netflix's relationship with Hollywood is shakier then it seems. Netflix is already commoditizing the DVD industry and that really does represent a direct threat to the studios. If less people are willing to pay $4 for a Blockbuster new release, then it will be harder for the studios to charge higher prices. Netflix ability to manipulate the long tail creates further problems for the studios' business model. Many studios want to get paid up front. By tapping into their archives, Netflix has done a nice job of creating profits that traditional video stores are unable to replicate.

Recently a lot of subscribers noticed that it was really hard to get new releases. I suspect that was because Netflix was negotiating new terms for their company and either wanted to pressure the studios or because they knew that they could increase buying at better prices once the deal was done. Sure enough when they announced earnings they also announced that HDTV content would cost the same and that their purchasing costs would actually decline. Hollywood is used to raising prices, not lowering them. We've seen theater tickets, cable prices & advertising revenue consistently rise over the years, but DVD rental prices have fallen dramatically. They cannot be pleased by this trend.

If you read the Hollywood press it can give you a good indication of what the studios are thinking and the strength of their business relationships. Hollywood Reporter wrote on the $5.99 price test and what I found interesting was that right in the middle of the page, they separated a single sentence into it's own paragraph:

"Netflix also would save money on the DVD revenue sharing deals it has struck with various movie studios."

This is the central message of the entire article and this will be all that studios pay attention to. The bottom line is a $5.99 price plan would not only threaten their revenue, but could put Blockbuster and Movie Gallery out of business as well. Hollywood doesn't know how to handle the digital revolution. They want to evolve with society, but they also want to cling to old business practices. Tactics like making you delete movies 24 hours after download and only providing low resolution copies are merely attempts by the industry to make DVD as necessary as possible. Even MovieBeam is a misguided attempt by the studios to try and slow the HDTV download market.

When Netflix first announced their plans to work on a download service, people got really excited. It seemed to be a natural fit to partner with TiVo to bring movies to the living room. When it comes to digital downloading, this partnership may have dealt a bigger body blow to Netflix, then anything else.

It's clear that the studios hate TiVo. Even though they can't stop the PVR revolution from happening they blame them for ushering in a new age of broadcasting. For the old economy executives this is a difficult shift for them to make. They've declared a vendetta on the company and will never allow TiVo access to downloadable content. While Netflix's partnership is a natural fit, I can't help but wonder if it was mistake. Perhaps distancing themselves from TiVo could do them more good then harm in the long run.

In the end, Netflix's subscriber base will always be strong enough to force the studios to work with them, but it's possible that Netflix dreams of digital downloads may be a farther off then we realize.


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