I don't get Netflix's business model. It's so thin. Distribute other peoples' content from other peoples' servers over other peoples' wires.
Also, film companies themselves aren't inclined to go vertical; there was a time when studios owned chains of theaters but antitrust litigation brought that to a painful end (United States v. Paramount Pictures, Inc., 334 US 131), so the industry sense is that self-distribution is too risky legally, and setting up their own independent competitor looks dangerously close to cartel behavior. Film economics are so brutal to begin with that litigation over anything other than well-defined copyright cases does not sit well with investors. Also, nobody wants to sink all the time can capital into building a CDN; being a technologist is a career-limiting move in Hollywood because the power revolves around the ability to bring stars, stories, investors and distributors together, so it's very much people-driven.
Of course film production involves a great deal of technology but if your specialty is in a technical role then you're considered a craftsman, not an artist. The thing is, the film product doesn't depend on technology for success; of course you'll want to use it for an action or superhero movie, but great movies can also be very simple, technically. Case in point: Joss Whedon directed The Avengers in 2011, but took two weeks off during post-production to shoot an (outstanding) adaptation of Much Ado About Nothing at his home. He used digital cameras to save time and cash, but it could just as easily have been shot on film and edited on a moviola.
It's kind of like saying: "I don't get eBay's business model. It's so thin. Distribute other peoples' products from other peoples' facilities using other peoples' trucks."
Exclusive licenses do indeed keep them ahead of competitors, but why would content owners give them an exclusive license? Netflix's leverage over content creators is their customer base, but that seems so thin to me when it's so easy to just sign up for another streaming site. My wife and I have a few subscriptions (Hulu, Netflix, Amazon Prime), and if say Paramount started their own service, it wouldn't be a big deal to add another one to the list. It seems like the studios have all of the leverage in that relationship, and a lot of incentive to cut out the middle-man.
It's very different from EBay's situation, where sellers have no practical way of identifying and reaching customers themselves, and risk getting lower sales' prices if they go with a competing auction site because of the network effects EBay brings to the table.
It's true that I'm not locked-in strongly, but there is some stickiness there.
The game Hollywood talent is starting to play is to flirt with companies like Netflix as sources of financing and distribution in order to play them off the studios. Talent benefits from more players on that side of things, which is why Netflix is able to get someone like Kevin Spacey (whose production company is quite forward-looking).
Netflix has a lot of cash to throw around, even by Hollywood standards. So far they're using it pretty intelligently, in a long, broad game.
They had an aborted earlier attempt with the DVD business to do something similar, Red Envelope. That was going to be their own distribution company. They were in here LA for a couple years, but from what I saw of them, the people running it were the wrong people. I think they've found the right people for their content business now. Seems to be working well, anyway.
They're also playing their strengths well, doing series instead of motion pictures for the most part. Series are binge-able, and that's something they have the networks and studios don't.
It's my perception that Netflix sort of triggered the start of binge watching as a phenomenon when they bought Lost for $40 million. There was a cohort who binged through that and talked about it, and then that got the idea out there. Then Breaking Bad was an interesting example when binging on Netflix and Amazon sort of retroactively moved the show from cult to huge.
They have lost exclusive distribution partners in the past, most notably Criterion (who went to Hulu) and Starz! Those hurt them, but they seem to be coming back from it.
In exchange for money?
> EBay's trick is that they connect (big number) buyers with (big number) sellers, and take advantage of network effects to stay ahead of the competition. In Netflix's line of business, the number of sellers is very small and well-known (a handful of large studios own almost all the valuable content).
> My wife and I have a few subscriptions (Hulu, Netflix, Amazon Prime), and if say Paramount started their own service, it wouldn't be a big deal to add another one to the list.
For Paramount to release their own service, they would have to pull their content from Hulu, Netflix and Amazon or no one would have any reason to use it. So they would have to spend big money on marketing only to regain the revenue lost by pulling their content from the existing distributors. Then they would have to build their own distribution infrastructure, code and maintain apps for different brands of smartphone and smart TV, etc. Why would they want to incur all that expense instead of just trading content for cash with the entities that have already done it?
See also: HBO GO.
I guess it works out for Netflix if users place a really high value in being able to get all their content from one place. At least watching my friends, who subscribe to a bunch of streaming services, I don't know if that assumption is a really great one.
Also, as as user, I've stayed far away from video content hosted by the big studios. They can't seem to keep their own executives from crippling access to their product - it almost seems like they need a Netflix to prevent themselves from overreaching to the point that it's a big customer negative.
Netflix isn't in all that weak a position if a given content holder withholds rights. For me anyway, Netflix already offers programming in excess of my time to consume it. As long as other quality content is available, then other content providers will end up getting that revenue.
Again, Netflix has a lower marginal cost for distribution than the content producer because their fixed costs can be amortized over more than one content producer and the marketing expense of convincing customers to sign up for the service is a historical cost for Netflix but a future expense for the content producer. Simply put, Netflix is more efficient at converting content into money than the individual content producer.
> Or I can license my content to an upstart Netflix competitor that charges (small dollar value) less.
The upstart Netflix competitor has the same problems as the internal studio distribution endeavor. They would have to duplicate all the costs Netflix has already paid. Meanwhile they would have to outbid Netflix for content from the studios. So the new Netflix competitor would have to spread their distribution costs over less content while paying the studio more money and yet charge lower prices. Who is going to enter the market under those conditions?
> Netflix is in a much weaker position. It can't easily replace my content if I pull it.
Why not? If you won't sell them distribution rights for X-Men then they can use the money they didn't pay you to buy distribution rights for Batman from the other guy, or produce more original content like House of Cards.