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Media Moguls Ask: Is Netflix Friend Or Foe?

May 1, 2011

Netflix last week was the object of envy and fear. The firm that’s evolving from DVD-by-mail provider to Web video subscription service showed in latest quarterly earnings that it’s growing at an astonishing rate. By charging as little as $7.99 a month, Netflix signed up 3.6 million new subscribers in the first three months of 2011, giving it a total of 23.6 million. That’s a 69% increase in just one year and puts Netflix ahead of Comcast and Sirius XM. Still, media executives don’t know what to make of the company. Is it friend or foe? Is it just another customer for studio-produced movies and TV shows looking to complement existing broadcast and pay TV providers? Or is Netflix poised to become a competitor to existing channels –- and even a formidable new gatekeeper for Internet entertainment?

The most realistic fear is that Netflix will amass enough subscribers so it can dictate prices to studios that want to transmit their entertainment over the Web to PCs, smartphones, and tablet computers -- as well as living room TV sets. If Netflix keeps its subscription price low, then it also may devalue all entertainment: A $4 charge for a VOD movie would look out of whack when you can watch an entire month of interesting shows for just twice that amount. But some industry forecasters say Netflix could do far more damage to existing business models if it drives a consumer stampede away from pay TV. The system would collapse if masses of TV viewers decide they’re fed up paying for hundreds of channels that they don’t watch, and cut payments to companies such as Comcast and DirecTV in favor of Netflix and free, over-the-air broadcast TV.

These are some of the considerations executives are weighing as Netflix takes its checkbook to Hollywood. Its spending for streamed content was up 534% last year to $406 million and is likely to keep growing this year. The company needs attractive programming so it can continue to reel in customers as DVDs start to become passé. But it’s unclear where Netflix fits in to the programming mix. Premium channels led by HBO, Starz, Epix, and Showtime have subscription broadcast rights for most hit theatrical films; the deals typically prevent studios from licensing the films to anyone else for at least a year. Netflix has persuaded most premium channels to provide it with online streaming rights to at least some of the movies and shows they’ve rented. Netflix has separate arrangements with studios and networks, mostly for re-runs of their TV shows. Arrangements have run the gamut to include all episodes of oldies such as Cheers and Family Ties, to previous seasons of current shows including Desperate Housewives, The Suite Life of Zach & Cody, 30 Rock, The Office, and Law & Order: SVU.

Meanwhile CEO Reed Hastings is saying all the right things to try and calm studios’ fears: He says he doesn’t expect Netflix to lead to cable cord cutting. He also says that his company will face formidable competition: Netflix’s rivals include Amazon Prime, Hulu Plus, and Blockbuster (now owned by Dish Network), and may soon include Apple, Google’s YouTube, and Walmart. Cable and satellite companies also are working on TV Everywhere offerings, free services that let their subscribers watch the same shows on Web devices that they can see on their home TVs.

But Netflix’s recent actions are starting to make some programmers nervous. The company looked like a rival to premium cable channels last month when Netflix agreed to pay an estimated $3 million an episode for the first-run rights to House Of Cards, an original hour-long drama that will star Kevin Spacey and run for at least 26 episodes beginning in late 2012. Hastings says it’s mostly a test, although he’s looking to add a few more originals to the mix. Showtime now refuses to provide its original series including Californication and Dexter to Netflix. Starz has started to hold originals such as Camelot for 90 days before turning them over for online streaming.

Whether friend or foe, Netflix can’t be ignored. It’s the only Web subscription service that’s available on virtually every major Internet-enabled TV set, game console, Blu-ray player, and connection device (including TiVo DVRs, Apple TV, Google TV, and Roku). It’s also on iPhones, iPads, and Windows Phone 7 mobile devices. Hastings says that “it’s a big priority” to get his service on Android-powered phones and tablets. Meanwhile, Wall Street’s betting that Netflix will upend entertainment. Its stock price, which closed Wednesday at $235.96, is up about 120% over the last 12 months and equals to about 80 times the company’s earnings –- which makes it far more expensive than shares of other media companies including Comcast (about 20 times earnings), Disney (19 times), and Viacom (29 times).

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