The Chutry Experiment

It has been an eventful week for the various players in the digital cinema industry, in particular Netflix.  Although there continues to be quite a bit of turmoil, Netflix has continued to buy the rights to stream films, especially from independent film distributors, suggesting that they still streaming as a major component of their business.  This CNET article, for example, offers a quick overview of the licensing agreement between Netflix and the independent film distributor, FilmDistrict.  The article touts Netflix as a means of providing consumers with “an inexpensive, simple, and legal way to access movies,” even suggesting that legal streams provide a viable alternative to piracy.

Still, the financial model remains unclear.  Netflix recently raised their monthly subscription rates for people who continue to receive discs in the mail (as I do), and there is still some debate about whether studios stand to benefit more by working with cable TV providers because subscription TV may actually pay more initially.  The same CNET article notes that there is some evidence that Netflix is contributing to the process of pulling consumers away from cable (i.e., “cord cutting“), although there is some debate about whether cord cutting is as significant as some have suggested.  David Carr offers one version of this narrative characterizing it as a “rivalry,” one that presents a dilemma for Hollywood studios.  Carr’s numbers do potentially underscore the idea that cable deals are more lucrative than online deals, pointing out that, to stream Disney and Sony movies, “Netflix pays about 15 cents a month for each subscriber, much less than the $4 to $5 a month that cable and satellite owners pay for access to Starz.”

Like David Poland, I am somewhat skeptical of this attempt to paint Netflix as an industry threat, however.  As Poland points out, Netflix is paying a large sum of change for the rights to stream movies and TV shows (or send them out on DVD), most of which are not the newest releases.  Poland also makes the argument that Netflix’s success as a rental service had little effect on DVD sales. I’m not quite sure I fully buy Poland’s argument here.  I’d agree that the DVD bubble had begun to burst a long time ago; however, I do think that Netflix helps contribute to the idea of movie consumption as an essentially disposable activity.  Because most DVDs are theoretically available within a few clicks (and possibly a somewhat slower mail truck), the urge to collect has diminished considerably.  Especially in a recession economy, I think that most film consumers are willing to wait through the so-called retail window and watch the movie later when it reaches Netflix or Redbox.  I also like how Poland parses Netflix’s business model, which he describes as an “everything everywhere” model rather than a model focused on the most recent movies, and Poland offers some pretty good data to back that up.

But one of the biggest concerns–and one that extends well beyond Netflix to anyone concerned with an open internet–is the issue of net neutrality.  Level 3, the company that helps Netflix deliver streaming movies, has complained that Comcast is charging them additional fees, essentially a “toll” on the delivery of certain kinds of data.  Although Comcast has argued that this practice doesn’t violate principles of net neutrality, the decision to charge additional fees on video delivery would likely complicate the inexpensive delivery of streaming video that is so crucial to Netflix.  Caught up in this conflict as well is Comcast’s planned acquisition of NBC Universal.  As the Times article cited above notes, Comcast could stream NBC shows more quickly than programs produced by their rivals unless the government intervenes.

It’s worth noting that Netflix is responsible for something like 20% of all download traffic, leading the Times’ Brian Stelter (again, cited above) to characterize them as a “de facto competitor” for Comcast, Time Warner, and other cable television and internet service providers.  Although Netflix had (as of the other day) declined comment on this specific case, New Tee Vee provides some good context, noting that the video rental service has expressed concern in the past about companies like Comcast and Time Warner that are network operators who also produce content.  As Wired notes, the FCC’s December 1 announcement of new net neutrality rules was met with disappointment, especially from consumer groups (and Marvin Ammori offers some good reasons to be skeptical, noting in particular that the new policies would exempt wireless internet access from net neutrality rules; see also, Josh Silver’s comments).  Long story short, I think that net neutrality rules (or the lack of rules or lack of enforcement) could hinder some of Netflix’s current practices.

Ultimately, I think it Poland is probably right to express some skepticism about the long-term future of Netflix (a point echoed by Time Warner’s Jeffrey Bewkes).  I’ll let you revisit his arguments about why Netflix’s power and long-term potential in the industry is overstated, but I think he’s probably right that the technological barriers for competitors are minimal, allowing studios to create their own streaming service.  I’d originally planned this as a links post, so I’m still putting together my overall sense of where things are going with digital or streaming distribution, especially given the ongoing conflict between Comcast and Level 3.

Update: Some good news on Net Neutrality.  Michael Copps, one of the Democratic-leaning FCC committee members has strongly hinted that he will not support the watered-down version of net neutrality currently being proposed.  Copps’ support is probably necessary, so this may give supporters of an open internet a little more leverage in their fight.