Tumblroth

My latest article is out in Wired, all about Netflix’s bold push into streaming movies to your TV. The article online is titled, Netflix Everywhere: Sorry Cable, You’re History, but the print headline better describes the piece: Netflix Inside. The piece looks at CEO Reed Hastings’ two pronged efforts to
1) get the Netflix software into any piece of consumer electronics equipment capable of showing a film and
2) persuade Hollywood that it’s in its best interests to sell Netflix the licenses to stream the films.

One of the fascinating things about researching the piece was witnessing how well Netflix has been able to fly under the radar. The company debuted in 1997, but it wasn’t until 2004 that Blockbuster realized what a threat Netflix was and tried (too late) to fight back. (Check out this chart of Netflix vs Blockbuster stock over the last five years; it’s amazing that we used to debate just how long it would be before Blockbuster destroyed Netflix.)

Similarly, now Netflix is spreading a service that I argue presents a real problem for the cable industry down the road. Hook up a Roku box, LG or Samsung Blu-Ray player, or XBox (all of which have Netflix software inside and more devices are to come) to your TV and you’re suddenly programming your own channel. Or buy a Vizio or Sony flat screen TV, which come preloaded with Netflix, and you’re doing the same. I know my own watching of cable has fallen off dramatically — almost entirely, except for Mad Men and Curious George (my older son’s latest addiction) — since buying a Roku. But I’m the exception for now. Even in this economy, cord cutting isn’t a reality.

Still, I don’t see how you stop Netflix from making inroads: the service makes getting content a snap, delivers it to the right place — your TV, not your computer — and is all you can eat vs. pay per view.

Cable is caught in a classic innovator’s dilemma: it can’t compete without hurting its own economics. Copy Netflix and it’s competing also with HBO, Showtime, Starz, etc., which are major sources of revenue. Offer more content on demand and it alienates Bravo, MTV, ESPN, etc. which depend on showing ads at a certain time in certain shows. The areas where cable trounces Netflix are live events (like sports) and its billions in subscriber fees, which grease the skids of the entire entertainment world.

The economics of the industry — and explanation of why none of the current giants are interested in bringing Web video to the TV — from the piece:

While the cable companies offer telephone and broadband, TV subscriptions still account for about 60 percent of their revenue. About a third of those fees get funneled to cable networks like Disney and Discovery, where they account for at least half of their revenue. Another chunk of subscription revenue goes to movie studios, which make more than $1 billion a year charging premium channels like HBO for the right to air their films. Even broadcast networks like ABC and NBC, which don’t make any money from cable bills, would still prefer that the content they make available online not be viewed on a TV set, because they can’t sell as many ads for their Web versions. Fox crams 18 commercials into every Sunday night airing of The Simpsons, earning 54 cents per viewer. But, according to research firm Sanford C. Bernstein, Fox airs just three commercials for the same show on Hulu—a site it co-owns with NBC Universal and Disney—earning a measly 18 cents per viewer.

What sets Netflix apart from other tech companies trying to cut out cable, is that it plays well with content creators. How? By promising cash instead of eyeballs or revenue-share-only plans. When Matt Stone and Trey Parker, the creators of South Park, were auctioning off rights to the first nine seasons, they settle on Netflix. The decision was simple: unlike Hulu or Joost, Netflix made a cash offer. In other words, like cable—though on a much smaller scale—Netflix is using its subscriber fees to bring content to the TV.

The more cable ignores the threat, the better for Netflix. It gives them time to sew up rights to stream content, which it badly needs. Last weekend, NPR’s On the Media did a piece about my Netflix story and it interviewed Netflix Chief Content Officer Ted Sarandos who tried to downplay any idea that Netflix streaming can’t live in harmony with cable. That’s part of Ted’s role, to be a peacemaker. And I think he’s right. For now. But when cable realizes just how much Netflix has changed the way people watch, it could be too late. Just ask Blockbuster.