Quickflix Has No Quick Fix
Robert Scoble thinks Netflix’s move is a good thing.
I don’t care about the Netflix news either. I’m on the other side. Streaming is clearly now and the future.
I remember when Steve Jobs left a floppy drive out of his new computer. Steve Jobs was right and lived to see another day. So will Netflix.
I think so too, but not right now – not with the copyright wars being won by the dark side. While I agree streaming is the future, I think Netflix may have committed suicide in their streaming department.
Luckily, the classic, DVD-based version of Netflix had an ace in the hole: copyright’s First Sale Doctrine. If a studio wasn’t willing to license its content to Netflix directly, Netflix simply went out and purchased copies of DVDs at retail. Renting out your legally-purchased copy of a DVD isn’t copyright infringement, so there was nothing the studios could do to stop this. And this strengthened Netflix’s position at the bargaining table, because they could credibly threaten to walk away from the table if the studios made unreasonable demands.
This became crucially important as Netflix moved into the streaming era. There is no equivalent to the First Sale doctrine for online streaming. If you want to run a streaming service, you have to cut a deal with each copyright holder whose content you want to stream. And Hollywood, fearful of losing control and undermining its existing revenue streams, has been cagey about allowing Netflix to stream its best content.
The DVD-rental option gave Netflix a crucial fallback position at the negotiating table. Because Netflix has a complete catalog of movies available for rent by DVD, they don’t need any specific title in streaming format. So they could cut deals with the content creators that offered them reasonable terms, and stick with DVD rentals for the rest. That’s a little bit inconvenient for customers, but it’s better than agreeing to terms that would force Netflix to jack up its prices.
And, of course, the total size of Netflix’s user base strengthens its bargaining position as well. There are many customers like us who primarily subscribe to Netflix for the DVDs, but we’re willing to pay a bit extra for the streaming option. A Netflix with 20 million customers—DVD and streaming—is going to be able to make bigger bids for streaming content than a streaming-only company with 10 million customers.
Inexplicably, Reed Hastings seems determined to throw these advantages away, leaving streaming to fend for itself. There’s a real danger this will result in a death spiral: the new, smaller company will have trouble landing content deals, or will be forced to raise prices in order to cover the costs of content. This will make the service less attractive to customers, some of whom will cancel their subscriptions, making it even harder to get content.
You can’t have your cake (copyright) and eat it, too (innovation).