Over-the-top video was supposed to disrupt the pay-TV business. Instead, it’s becoming more like it.
Netflix has made no secret of its goal of becoming more like HBO by pushing into original series, but BTIG Research analyst Rich Greenfield detects signs that Netflix’s long-term strategy for aping premium cable may go beyond original productions:
[W]e believe a successful original programming strategy could actually create an even more powerful lever for Netflix to pull in 2014/2015. In our June 2011 blog post (click here), we highlighted a quote from a Reed Hastings interview at the D9 Conference:
“…You know the more people watch online video, the more they subscribe to broadband. And the great thing for cable or telco is broadband subscribers…you know they collect 40 bucks a month and they don’t have to share half of that with content, ok whereas you know on the video side half of that goes to content because we are paying all the content and you know we haven’t yet said you know of your $40 broadband we are 30% of the traffic so we want 30% of the revenue umm so because we haven’t done that there is still a good relationship.”
Other than ESPN, for ESPN 3, no content provider has sought a broadband sub fee and even in ESPN’s case, it is a bit difficult to isolate the broadband fee paid by ISPs from the overall deal ESPN signs with the MVPD that operates the ISP. When we raised the prospect of Netflix asking for a broadband sub fee in 2011, we received significant pushback from investors who thought the content was not unique enough and consumers would simply go elsewhere. Fast-forward 18 months and Netflix has made a rapid transition to exclusive programming rights (culminating in the recent Disney Pay 1 output deal) and an original programming push from nothing in 2011 to 5 series in 2013.
In other words, Netflix may be setting up a strategy to charge ISPs for carriage, just as pay-TV networks charge cable operators for carriage. In fact, according to Greenfield, Netflix is already doing something very much like it:
The recent spat between Time Warner Cable and Netflix over access to UltraHD and 3D content access may be a sign of things to come as it relates to a broadband sub fee. From a January 16, 2013 Multichannel News article (click here) citing a TWC spokesman:
”We believe it is wrong for Netflix to withhold any content formats from our subscribers and the subscribers of many other ISPs.”
In this case, Netflix simply wants Time Warner to work with its OpenConnect initiative, rather than actually pay a broadband sub fee, but it is effectively the same thing. Netflix is refusing to make certain content available to an ISP, without reaching an agreement that is deems acceptable (really no different than the way programming and retrans deals work in the video world).
Meanwhile, YouTube is reportedly following Netflix’s lead in turning the web originals business into a paid subscription model. According to Ad Age, the Google-owned video site is in talks with some of its original content creators about adding a paid subscription option to their YouTube channel.
In response to the Ad Age report, a YouTube spokesperson issued the following statement:
We have long maintained that different content requires different types of payment models. The important thing is that, regardless of the model, our creators succeed on the platform. There are a lot of our content creators that think they would benefit from subscriptions, so we’re looking at that.
Original productions, paid subscriptions, and retransmission fees. Where I have I seen that combination before?