Netflix King Monopoly

Netflix is the big cheese of subscription VOD. There’s no argument that Reed Hastings and company have built a huge lead in the sector, with more than 40 million global subscribers.

Now some analysts believe Netflix is on the cusp of cementing its No. 1 position for good with the potential to have monopoly-like control of the market. But it’s unlikely the house that “House of Cards” helped build will occupy the SVOD throne forever, vanquishing any would-be rivals.

Netflix has projected it will spend nearly $3 billion in 2014 on content — but it should be acquiring even more, to broaden its subscriber base as well as pad its lead against Amazon and Hulu Plus, analysts Tony Wible and Murali Sankar of Janney Montgomery Scott contend. “At some point Netflix could emerge as a monopolistic player in its SVOD niche that would allow it to increase pricing, subs and leverage in content negotiations,” the analysts claimed.

Netflix’s content obligations stood at $8.2 billion for the third quarter of 2013. That’s a big number, but relative to revenue, it’s in line with large TV networks that rely on licensed third-party content, according to the Janney analysts.

And as it expands buying and shifts toward originals, Netflix’s margins and content-obligation coverage stand to benefit. “Our view is that an aggressive spend may force other players to reconsider their commitment to this space or to modify their business models,” wrote Wible and Sankar, who have a “buy” rating on Netflix.

But will the Netflix juggernaut so demoralize the likes of Amazon or Hulu that they simply cut and run? I doubt it. There’s certainly room for two or three broad SVOD services in the market.

More to the point, Hollywood has a vested interest in that diversification: Studios and TV networks are disinclined to empower a single distributor that captures outsize leverage in a market. Note the clout Apple has wielded in the music biz by developing its early iTunes lead.

If Netflix gets too demanding, you will see more of the kinds of battles that have dogged the pay-TV industry extend to the SVOD arena — content owners will happily take their toys and play elsewhere. Witness the shift Viacom made last year: The media conglom expanded its exclusive licensing agreement with Amazon for SVOD rights to a subset of shows from Nickelodeon and other nets weeks after the shows came off Netflix.

Of course, that dynamic assumes Amazon, Hulu and others like Redbox Instant from Verizon will continue to have an appetite for SVOD content. For the next year, at least, there’s no sign they will reverse course.

Meanwhile, pay-TV providers have been eagerly collecting VOD rights to fend off Netflix and keep their customers paying for cable or satellite service. So Comcast and others are a second set of willing buyers for SVOD rights — and another check on Netflix assuming excessive control.

At an investment conference last fall, Disney chairman and CEO Robert Iger specifically addressed the question of whether Netflix has sewn up the SVOD game. Disney is helping fuel Netflix’s ascent via an exclusive movie-output pact that starts in 2016 and other deals, including a pact to develop original series based on four Marvel street-hero characters.

“We like what we’ve seen from Netflix,” Iger said, “but it’s going to be really hard for them to corner the market or get a monopoly” because the barriers to entry in SVOD are lower than in traditional media.

Translation: Disney will find a different partner if it needs to.

Netflix has strong momentum now, and it’s going to keep growing into 2014 and beyond. But the notion it could establish a position in SVOD as dominant as, say, Google’s in search seems remote. Netflix, crucially, relies on an ecosystem of content providers — and those partners don’t want Netflix dictating the terms of how they make money on digital entertainment.

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