Netflix (Nasdaq: NFLX) is falling on a generally positive market day. The culprit? Several large Hollywood studios are banding together to create a brand-new digital streaming service with some unique perks. A nervous market takes that as a threat to the Netflix business model.
And that's completely wrong. Again.
What's the deal?
Sony (NYSE: SNE), Walt Disney (NYSE: DIS), and Time Warner's (NYSE: TWX) Warner Bros. are talking to a conglomerate of cable TV operators to hammer out an on-demand service for films still in theaters. The studios want to charge as much as $30 for a rental through your digital cable box.
The substantial premium over a regular $4 on-demand rental would be supported by quick availability, well within the 120-day window that's usually reserved for movie theaters and maybe even day-and-date on premiere day. The addressable market looks to be large, as the studios are talking to a joint venture between Comcast (Nasdaq: CMCSA), Time Warner Cable (NYSE: TWC), and Cox Communications -- three of the largest cable providers in the nation.
Put their digital cable subscribers together and you get a massive potential audience for whatever flicks the studios agree to send down the pipe. Once this model is a proven success -- which looks like an inevitable outcome from where I sit -- you can bet that every cable service large and small will want in on this action.
Why isn't this a big deal for Netflix?
This project may end up transforming how studios, theaters, distributors, and consumers think about movie releases. A shorter or nonexistent release window would appeal to viewers who can't get a babysitter or prefer to stay home for other reasons, and this will have two effects: The total market should grow significantly if the pricing balance is right, and part of the revenue stream moves from the theater to the living room.
What it doesn't do is pose any threat to Netflix. In fact, this deal would only legitimize the streaming business model and hasten the demise of physical media such as DVDs and Blu-ray disks.
You see, Netflix plays to a different crowd. The company has never tried to be the destination for piping-hot new releases, but makes a very comfortable living on the long tail of cinematic content. Let the early birds pay through the nose for a hot-off-the-presses release -- at $30 a pop, the price would be comparable to a handful of movie tickets, hold the popcorn.
Netflix swoops in later, when the value-minded movie watchers get their hands on the same films at a much less painful price point. This is what Netflix does, in the very words of CEO Reed Hastings. It has proven to be a popular and sustainable business model. Let other media distributors fight over the big-ticket early access; Netflix doesn't need it. The company will take a few licenses for fairly early streaming access to new material but I don't see it ever reaching for concurrent theatrical streams -- the studios will price them way out of the Netflix price range.
Who's hurting, then?
If the studios are hurting anybody here, it's AMC and Regal Entertainment Group (NYSE: RGC), whose cinematic audiences may choose to stay in front of their big-screen home entertainment systems in coming years. This is the way the industry is leaning, and it was only a matter of time before it happened.
The digital revolution is happening before your very eyes, dear Fool. I hope you saw it coming years ago and invested accordingly, by buying into Netflix or the more forward-thinking studios. These are the giants of the next generation; dinosaurs of the physical distribution era will shrink or die.
The market is acting as if Netflix just met a nemesis, but it's really an ally in disguise. Feel free to take this opportunity to start a position, or at least put an "outperform" rating on Netflix in our CAPS system. You'll be glad you did when the smoke clears.
