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?
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.
- 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.
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.