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Comment by macrael | Hacker News Reader

The most convincing explanation of their actions I read was essentially:

1. they made streaming a free add on to DVDs to get people using the service, which resulted in streaming becoming popular.

2. The media owners started to (or perhaps always had) cut their deals with Netflix on a per subscriber basis rather than per view. So Netflix was paying the networks for everyone who subscribed, including evyone who only watched DVDs. This became unsustainable.

3. So, they needed to separate these people, thus the split.

I honestly don't see how they could have handled this differently, they needed to tack the service on to DVDs to get people on board, and they needed the services to be separate to actually make money on streaming long term. It might have worked if they had been able to pay for videos on a per view basis, but I'm not sure they have the clout to make that happen.

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I think they were paying a flat amount for an up to X million subscribers, not a per subscriber fee. Then they got close to the cap and needed to remove the people from the cap that weren't really using it, but the contract counted everyone that had access. It's pretty much the same thing though.

Where does that information come from? Is that a common way for such deals to be made?

He pulled that information out of thin air. It is not true.

Here is where I saw it:

"However, the contract Starz has with Sony has a subscriber cap with regard to Netflix. The home entertainment company now has more than 23.5 million subscribers, which exceeds the cap. Starz pulled the movies from Netflix so it wasn't in jeopardy of violating its deal with Sony."

http://latimesblogs.latimes.com/entertainmentnewsbuzz/2011/0...

Please note that it was Starz who had a contract with sony that had subscriber count as a term in the contract, not netflix.

I found the article I summarized here: http://www.outsidethebeltway.com/whats-really-behind-the-net...

I think it explains the facts in the simplest way.

My take home is this:

Netflix competes as a delivery pipe for content with Cable providers.

Cable providers already get ~$50/month for your Internet connection, and spend (collectively) $32 billion/year on streaming content, aka "cable TV".

Netflix wants to build on top of the network infrastructure of Cable providers while paying far, far less for the same content. This is their business strategy.

Verdict? Sell your Netflix shares. They are trying to operate a toll booth on a road they don't own. Furthermore, the actual toll operators (the Cable providers) are already getting 3-4x the $$$ from users, are already paying for the streaming content, and they show no history of being as stupid as the music companies (Tivo anyone?).

I don't see how Netflix can compete. That streaming was Hastings' personal vision for the company means nothing without a way to get there, and as far as I can tell, short of legislation, there is no way to get there.

For those wondering why Netflix was allowed to stream content at low cost so far, here's the reason: marginal consumers.

Currently, the content industry gets $32 billion/year for content. There are still a few people ("marginal consumers") that aren't paying for content now, but at a much subsidized price, are willing to view it.

These are the customers Netflix has right now for streaming.

Now here's the problem: marginal consumers are only marginal when the represent an insignificant portion of users. When they grow numerous enough, the pricing terms have to change. That's why Netflix is jacking up prices.

Eventually, Netflix will have to pay the same price as Cable providers for content (and it's nowhere as close to as cheap as what Netflix is charging now).

That sounds right to me. Honestly, worded that way, I'm a bit dumbfounded at their audacity.

I mean, on the one hand, the cable companies are tied up with the old "channel" model and many of their subscribers are paying for shows they never watch. But, if the content companies are going to charge Netflix customers for shows they don't watch too, it is going to be very difficult for Netflix to compete.

Your argument implies that when you pay ~$50 for an internet connection, you also get access to all the streaming content ("aka cable TV") from the Cable company.

This is not the case. Getting access to the content will cost you an additional 70-100 per month, depending on the content package. That's significantly more than Netflix wants to charge, and the delta is a huge part of Netflix's appeal.

Your "toll booth on a road they don't own" comment sounds alot like Ed Whitacre's "my pipes" argument, and could be applied equally accurately to any non-free service that operates on the internet ("road they don't own.")

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