For a while, Netflix (NASDAQ:NFLX) offered a lifeline to television producers. The streaming service paid relatively hefty fees to air shows, creating a new revenue stream for content owner at a time when DVD sales were plummeting.
Recently, however, Netflix has gained access to enough content that it's making consumers reconsider whether they need a cable subscription at all. Spend $9.99 a month on the streaming leader, and maybe another similar amount for Hulu or Amazon (NASDAQ:AMZN) Prime, and consumers will have access to most of the top shows on TV.
Yes, for some hit series, you'll have to wait, but that's not a very big concern for many when they have a long list of shows waiting to be watched. By licensing Netflix so much top-tier TV content, the broadcast networks and cable channels have begun to cannibalize their own business. Allowing the streaming giant access to their shows has become a double-edged sword, where on one hand they get paid, but on the other, they make cord-cutting more attractive.
It's a complicated problem, and at least one company that creates content it currently licenses to Netflix plans to pull back.
Which company is scaling back?
While he did not slam the door on Netflix entirely, Time Warner (NYSE:TWX) CEO Jeff Bewkes said his company was considering changing its policy on licensing to streaming services during its Q3 2015 earnings call.
"We are evaluating whether to retain our rights for a longer period of time and forego or delay certain content licensing," he said. "This would effectively push the [subscription video] window for content on our networks to a multiyear period more consistent with traditional syndication."
Basically, the CEO wants to make companies including Netflix wait much longer before licensing them Time Warner shows. This would, in theory, force people to keep cable subscriptions and raise the value of the company's cable properties including TBS, TNT, Cartoon Network/Adult Swim, and HBO.
Even if Time Warner follows through on doing this, the changes won't take effect until its current licensing deals expire.
Netflix sees this coming
Never one to be caught unprepared, Netflix CEO Reed Hastings has been readying his company to deal with this issue.
"Some studios will choose to license content to SVOD services like Hulu, Amazon Prime Instant Video and Netflix. Others may not," he told shareholders in its October quarterly investor letter, before telling them not to worry. "We have a lot of content to select from."
To combat the loss of some programming either because it goes to another streaming player (like Hulu buying Seinfeld reruns) or because the programmers won't make deals, Netflix is spending heavily on original programming. This includes a number of new series as well as a talk show from Chelsea Handler, movies from a variety of top-tier producers (and some from Adam Sandler), as well as hints that it will offer some sort of news product.
It was bound to happen
Netflix offered easy money to the content owners, and all it cost them was the viability of their brands. The pullback Time Warner is considering is inevitable, especially as more cable channels and content owners attempt to launch streaming services of their own.
Ultimately, this will be bad for consumers because they will either have very long waits to watch shows on streaming services, or they will have to keep paying for at least part of a cable package. Of course, even if Netflix only ends up with older TV shows in its licensed archive, it will still offer a good value to consumers.
Spending less on licensed content frees the company up to spend more on originals. That may force people to pick between services or spend more than they wish to, but it seems unlikely to harm Netflix or cost it many subscribers.
It makes sense for Time Warner to pull back its content and wait longer to license it. It will also be logical for many program owners to do the same thing. It's the kind of move that will likely cost them some short-term revenue, but put them in a better competitive position over the long haul.
Call it a small win for the content creators/cable channels, a slight blow to Netflix, which the company can easily handle, and a small loss for consumers, who may have to spend more to see every show they want to watch.
Daniel Kline has no position in any stocks mentioned. He is looking for a new show to watch on Netflix. The Motley Fool owns shares of and recommends Amazon.com and Netflix. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days.