Shares of Netflix (NFLX) are under pressure today, down some 5.2% during the middle of the trading session. The stock appears to be down based on news that one of its content partners, Time Warner (TWX) unveiled a new streaming service to bypass Netflix.
The catalog of content will include classic TV series and movies from Warner Bros., and it will be available through a web-based platform, mobile app and Roku players. The service is priced at $9.99 per month.
The news from Time Warner is just another example of content owner's going directly to the consumer to monetize their content. The question content owners must ask themselves is: "Can more money be made at lower risk from developing my own subscription service or through licensing my content to Netflix."
To make the decision, the content owner must model the costs to develop, market and administer the service and estimate subscriber growth rates. If the economic profits derived therefrom are larger than anticipated licensing income from licensees, the content owner could logically decide to exclude the licensee from using the copyrighted works.
And that is the crux of the issue and why Netflix is moving towards developing its own, proprietary content: Netflix's moat of content distribution is susceptible. However, with a growing market, as digital content consumption is, competition won't be as severe as the rising tide is lifting all boats than it will be when the market becomes saturated.
The situation the content distributors find themselves in is not unlike how newspaper and magazine publishers are moving towards using Adobe's (ADBE) HTML5 programming language to create mobile sites that interact with tablets, thereby bypassing Google's (GOOG) and Apple's (AAPL) app stores, avoiding the revenue share.
Some pundits believe Netflix is in a precarious spot. Jim Cramer wrote:
Most of all, Netflix would put Microsoft (MSFT) back into the living room where it needs to be, and not just on the desktop where it is. It would make Microsoft relevant again and, believe me, part of the reason why Microsoft is such a dog is that the company isn't regarded as being cool or bold. Nothing could be bolder than getting into the homes of 27 million Americans -- and growing -- and then financing the international expansion with spare change.
Sheltered by Microsoft's bulletproof balance sheet wouldn't change the competitive landscape for Netflix. But, as Mr. Cramer pointed out, Netflix could benefit from Microsoft's robust free cash flow to finance its content production. But whether Microsoft should be in the movie production business is another matter.
Speaking of other matters, one lesson we learned today in the direct to consumer/investor model came to us courtesy of the Securities and Exchange Commission ("SEC"), and it related to CEO Reed Hastings' use of Twitter to disseminate that Netflix had surpassed 1 billion hours of total viewing time.
The SEC announced a new position with respect to disclosing information from insiders of public companies. Management must disclose which officials can or will disclose information about the company, and over what social networks, ahead of time.
Netflix may just be sidestepping traditional financial disclosure mediums, just as content owners are dodging them.