Time Warner talks Netflix smack: That's life with frenemies

Time Warner talks Netflix smack: That's life with frenemies

Summary: Time Warner CEO Jeffrey Bewkes sure looks like he's on a Netflix jihad, but the reality may be a lot different. Does Bewkes really think Netflix is played out or is he simply trying to gain some sort of negotiating leverage for a future content deal?


Time Warner CEO Jeffrey Bewkes sure looks like he's on a Netflix jihad, but the reality may be a lot different. Does Bewkes really think Netflix is played out or is he simply trying to gain some sort of negotiating leverage for a future content deal?

Pick a day and Bewkes' comments from a UBS investment conference last week are being used to either diss Netflix, question its future and point to much higher content costs ahead.

Take the New York Times. Bewkes said Netflix is overhyped and likened the bullishness about the streaming movie player to the Albanian army taking over the world. The Times was following a Wall Street Journal story noting how Netflix has garnered respect and sparked fears about its impact on cable. The Journal also followed up by pitting Bewkes against Disney CEO Robert Iger, who cut a deal with Netflix.

The storylines here are obvious.

  • Bewkes is talking smack about Netflix because he's worried about how the streaming service could ding HBO. In addition, HBO will compete with Netflix once its on-demand service scales across platform.
  • Time Warner is worried about Netflix's distribution clout.
  • Bewkes doesn't get the big picture. Netflix will rule the world.

The truth is probably some mixture of the first two options with a heavy dose of negotiating leverage thrown in. I've read the transcripts of Bewkes talk at the UBS conference last week a handful of times. In addition, Netflix CEO Reed Hastings talked at a Barclays Capital conference last week too.

Reading between the theatrics leads me to the following conclusions.

  • Bewkes knows he has to deal with Netflix at some point, but his comments about the devaluing of content prices (notably the Netflix deal with Starz) indicate he wants real value. Bewkes is trying to position Netflix as a lower end service than his beloved HBO, which is losing subscribers.
  • Hastings seems to acknowledge that the Starz deal, which really put Netflix's streaming service on the map, will cost the company more in the future. Hastings even said that Netflix would do fine without Starz. Hastings said:

The Starz deal turned out to be a great deal for us. We did not know that initially. And we will try to renew it and try to figure out is there a value overlap. But it is not -- there is no one piece of content that is essential for us. It is great content. We would like to have it, but we can live without it if we have to.

  • The two parties---Netflix and Time Warner---will wind up doing a broader deal. Netflix has said it will pay a fair price for content, both old and new. That argument fits in with Bewkes' need to cut a better deal.

In other words, all of this hubbub over Netflix is really a sideshow to negotiations in the future. Netflix and Time Warner are frenemies that will need each other. Of course, Time Warner plans to compete with Netflix with its HBO to Go effort, but ultimately content providers need distribution. And with Netflix likely to pass 20 million subscribers in 2011---it has 16 million now---Hastings and the gang have some serious distribution.

I could be wrong, but this Bewkes vs. Netflix storyline appears to be a bit played out. Fortunately for Netflix Bewkes may be raising some doubts about the company. For the last decade, the natural order of the universe dictated that there had to be folks doubting Netflix. Now everyone is on the bandwagon---except for Bewkes. Hastings should send Bewkes a nice card for the holidays.

Here are some excerpts from Bewkes talk last week and what Hastings had to say. Add it up and these two crazy kids will get along fine.

Bewkes said fielding a bevy of questions from investors last week about the pricing of Netflix's service:

I think it's a very legitimate concern that investors should have and media management should have, that, obviously, we should pick and nurture economic models that advantage the economics of the content, number one, and that build on and strengthen the power of the brands because, remember, that getting media content -- because, by definition, good media content is new media content. It's something that you haven't seen before -- freshness, the ability to introduce very specific kinds of product and have all of the people out there know where to go to find new product and do it in an easy and effective way -- it's very important. That's why cable TV networks have a higher success rate than broadcast networks and new programming, because it's more lined up with what to put on and what the viewer wants.

So we need to make the brands stronger and use the strength, and we need to not devalue the content. And I think, as you go to your question about which new models, which new players and which new experiments -- because I think that's what they were -- were successful and which were not, I think some of the things that you see in place now are not going to continue because they are not in the interests of maintaining or increasing the value of content and they don't take advantage of and utilize and strengthen the power of brands to develop and introduce media content to people. Simply put, large aggregation and low price is not a particularly useful thing for consumers or content creation.

Translation: Bewkes wants better pricing for Time Warner content.

Hastings at the Barclays conference a few days later:

We announced an extension and expansion of our ABC relationship with a lot of new content -- all the past seven seasons of Lost, Brothers and Sisters, Ugly Betty, 20 or 30 shows, an enormous amount of episodes. So a big expansion. Most of it is prior season. That is the main place we focus is on prior season, but some of it is current season that's got a 15 day from broadcast delay. So a new form of window for us that we are trying out with ABC. And we are very flexible in our content buying. We will take content that is old, new. We will try to pay the right amount for it. And I think with the ABC deal, what we are showing is we can continue to pay enough money to make it compelling for content owners.

Translation: Netflix will come up in price.

Bewkes then tried to toss Netflix in the ghetto. Netflix is a utility, but not a premium service. He said:

I think we ought to enlarge it to not just Netflix, but the idea, let's say the function of an $8 to $10 subscription service. If you stop and asked yourself, well, what does that do? What's the utility for consumers and what is the -- what kind of licensing of product should go into a subscription service that is available for $8 to $10, it's on-demand, and it attempts to have a kind of a wide-bin inventory of movies and TV series and all of that?

And I think you quickly come to the realization that the natural place for that kind of a service, which has some value, because it's a utility service, is for content that doesn't have a higher use in other platforms and in other windows. So, in other words, that kind of licensing, if you think of what movie products should be there, what kind of TV series products should be there, basically it should be things that don't have further monetization or higher monetization in a window on a pay-TV network, on a basic cable network.

Hastings said Netflix's new price points---the $7.99 streaming only service---is about passing along scale to consumers. He said:

The reason for the timing of the shift is the growth in streaming, and the key insight is that the cost of fulfilling a new trial for a streaming customer is substantially less than they are in a hybrid-like model. You don't have postage. You don't have packaging-related costs. You don't have the direct labor costs.

Bewkes plays the fad card with Netflix. He said:

I think, is that this is the experimental phase of this new animal, is that currently that service has -- is carrying programming that was licensed to it under the impression that licensing, say, TV series to a network for television is different and not competed with if you license the exact same programming to an on-demand service.

And in fact, it's not different. And you have to realize that all of the programming that gets licensed to a TV network like a TNT or a USA and what gets licensed to a subscription network like Netflix -- it all increasingly ends up on the TV. So it's the same set of rights. And I don't think it makes sense, certainly for our TV networks, to license series programming which we are going to put on demand -- we have been very clear about that. Our programming series on TNT are going to be available in current episodes on demand for you for no extra charge because you've already got that in your home. It doesn't make sense for us to pay big money to license those series and have them show up on some other service that's running 100 episodes forever at all times.

Hastings batted that fad card right back. He said:

I mean think for us we are on that virtuous cycle of more subscribers that. It means that we can write bigger checks and get more content, and that, in turn, attracts more subscribers. And we are going round and round that loop as we go. And where does it saturate? Does it saturate at 100 million? Does it saturate at 40 million? You know, it is unclear. What is clear is that our growth is accelerating. We are over 50% annual subscriber growth, which is just enormous. And that will play out for a while. We will keep expanding the content.

Bottom line: A deep dive on the Bewkes comments indicates that he's deploying some common negotiation tactics---in public.

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  • Cable and Satellite are in a tough position

    I haven't had cable in many years, using satellite instead, but both are in a tough position. On the one hand, you have the companies providing the channels wanting ever more money, and on the other hand are new providers like Netflix and Hulu offering a different delivery method at much lower prices. Add to the mix a down economy forcing many to trim their budgets and cut back or eliminate luxuries like TV service and you have the makings for tough times for the cable providers.

    I have gone down this road myself. I recently trimmed my satellite subscription down to a very basic service, yet still find that I am paying way more than I would prefer. I also complain that I end up paying for a great many channels that I have absolutely no interest in. My thought is to put up an antenna for local channels, and get everything else online. Since my internet service is not tied to either cable or phone, I can cut the cord easily. The only thing holding me back from making the move immediately is my wife. Once she is comfortable with getting her favorite shows from the internet there will be nothing to prevent the change.

    If I was Bewks I would be worried.
    • RE: Time Warner talks Netflix smack: That's life with frenemies

      Try the Roku box. There is no simpler way to to get mainstream content from the internet. It supports Hulu Plus and Netflix. I've been trying get my family to allow me to set up a home theater PC for two years and they refused because it was too complicated. A week after I installed the Roku they weren't watching anything from our satellite TV service anymore. They love being able to just pick a show and watch it on demand without having to worry if it recorded on the DVR or not.
      • RE: Time Warner talks Netflix smack: That's life with frenemies

        I agree with you 100% there. We got a Roku this summer just to watch Netflix, but discovered there are alot more channels available. It's awesome!
      • Hate to put a damper on all this

        But I have no doubt Slime-Warner will find a legal reason to shut this down. They aren't making the fat, obese profits that they would from the cable company monopolies showing it to you, along with price gouging your wallet every month.<br><br>Enjoy it while it lasts.
        search &amp; destroy
  • RE: Time Warner talks Netflix smack: That's life with frenemies

    Well Bewks is an Id10T. Everything and anything that is on TV can be seen on the internet with no or little commercial interruption. I've dropped cable TV, and well, I guess you can say I've dropped TV all together. As soon as more widely available/known consumer products like Roku box, then Cable/Satellite will be obsolete. After all, anyone remember this phrase . . . 10,000 channels and still nothing good on. I want what I want, and when I want it. Screw scheduling, release a new episode at midnight on the day it is supposed to be on "air" and let me chose when i want to watch it.
  • When will they ever learn?

    Netflix is the SAVIOR for these media companies, but they will push and push and push until Netflix loses all it's content and they make a "better" Netflix that's $99 a month plus on demand add-ons, and then everyone will go back to downloading the stuff for free.

    Take the $10 a month. Most people will probably go as high as $20. But don't push it, media companies.
  • YES!!!!!

    It's about time the big content providers put the smackdown on Netflix which is nothing more then a glorified set of fat pipes to the content. $99/month here we come!
    • They will

      No more internet TV. I can see it coming.

      You don't need to worry about the government censoring the internet. The big fat monopolists like Slime-Warner will do it for them.
      search &amp; destroy
      • RE: Time Warner talks Netflix smack: That's life with frenemies

        @search & destroy That's fine. Then I can drop the $20 I pay to NetFlix and Hulu and go back to good old fashioned torrenting. There are also very big networks of non-internet pirates to go to if they shut that down too. They will NEVER kill piracy but NetFlix and Hulu are great deterrents. I think I've torrented ONCE since joining...
      • I agree with you

        But greed (and control) still rule the day.

        Sorry for being so pessimistic, but that's the way business is run, nowadays... They don't like change.
        search &amp; destroy
  • NetFlix May Hurt But PIRACY Hurts More!!!

    Now be big boys and take your medicine!!
  • The true is a lot simplier then that

    the content industry (MPAA/RIAA members and the like) can't stand consumers to have choice and value for their money. the whole enterteiment industry business model is based only a single thing: ripping off consumers.

    it is time for the goverment (if there is a single politicien not allready in the pocket of hollywood) to put it's feet down and REGULATE. Force content provider to licence their entire catalogue to netflix and also SET THE PRICE so netflix will not have to raise it's price.

    The content industry corrupted beyound repair. If the actual law where to be applied, hollywood will disapear overnight... because everyone working there will be in jail.
  • RE: Time Warner talks Netflix smack: That's life with frenemies

    Psst........TW & Comcast.....don't try to reinvent the wheel when dealing with Netflix. Just make it work for you. After all both of you are interdependent on the success of each other. Why? Because TW & Comcast cannot compete price wise with Netflix when it comes to delivering streaming movies. TW & Comcast are both motivated by greed and that bunker mentality just like MS. Get on board or get left behind!
  • RE: Time Warner talks Netflix smack: That's life with frenemies

    You big guys better wake up....not eyeryone is making millions a year. Come outa the clouds. I quit Comcast years ago (or whatever it's called now) when they just raised prices nilly~willy. Roku is the way to go...If Netflix raises their prices too high...good-bye, but for now, it's reasonable. The economy is tough, there are only so many dollars out there to stretch...Squeeze too much....well you can do the math.... JB Philly
  • RE: Time Warner talks Netflix smack: That's life with frenemies

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