A Contrarian Take on Future for Netflix and Google TV

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 |  Includes: GOOG, NFLX
by: Akram's Razor

I am a big fan of Mark Cuban. He is a media visionary and unbelievably accomplished entrepreneur, and I almost always find myself agreeing with what he writes, which is why I was so surprised by his recent Google (NASDAQ:GOOG) TV / Netflix (NASDAQ:NFLX) article.

Cuban wrote:

If Google sticks to their guns of not paying up front for content like Netflix does, they will have handed Netflix the entire streaming universe on a platter.

I disagree. Paying up front or licensing is not the only way to monetize content. Google/You tube offers content owners the opportunity to experiment with release windows, and thus offers the potential to optimize revenue. The content creators can extract more value out of higher quality content and reduce costs on lower quality content.

To argue that they are handing netflix streaming is to assume that there is not a zero sum game being played here. The value of retransmission rights through old mediums falls once the content owners give nflx a release window too close to the current traditional mediums, which I would argue some have already done.

This erodes the value of live/ early release window content which of course kills advertising dollars. It probably will also impact box office revenue down the road as nflx has in effect opened the door to monetize all kinds of second rate content as well as delayed(last seasons Dexter for example)) top tier stuff. Jumping too quick on the nflx bandwagon to cash in fast is a very dangerous move for the industry.

He continued:

So riddle me this batman. Netflix is on Google TV, correct ? Given that Netflix pays and Google TV doesn’t, why wouldn’t/shouldn’t the broadcast networks offer all of their shows to Netflix as a way to reach Google TV users, knowing that they will get paid for their content. Paid HUNDREDS OF MILLIONS OR MORE for their content.

Google TV is to my understanding a TV OS. It does not insert ads into the network site. It doesn’t customize the viewing unless you have signed on as a partner like a HBO or TNT. It’s just providing you with a more integrated way to search the network content as you would be able to do on your pc, iPad (NASDAQ:AAPL), Macbook etc.

So, Marc is making a very different argument here. He is basically arguing that search through TV OS is tantamount to retransmission rights. Interesting argument, but this goes beyond Netflix/Google TV. Google TV is providing you an interface. It still requires that you have cable/satellite TV connection as well as an internet connection.

If that is the case isn’t it up to the isp provider to pay retransmission rights to the network for web content? My understanding is this spat is over the fact the Google is not doing enough to block the pirated content, meaning you can use your Google TV to watch live TV you just can’t watch whatever NBC or ABC (NYSE:DIS) has put on its web site that is free and full length. I think Marc has misinterpreted this spat.

He opined:

All you internet pundits want the broadcast networks to give the content away for free. THAT IS STUPID. Get Netflix to pay you on a per subscriber basis on par with what your other TV providers pay you. Netflix becomes a competitive TV provider. BRILLIANT. You get paid. You reach Google TV users and non Google TV users.

Again we run into the same issues here. If it’s free on-line already why would you pull it and then give it exclusively to NFLX? This kind of defeats what the networks are trying to do with Hulu. You are almost arguing for turning nflx into a sole TV portal. But like I pointed out earlier what does that do to cable/satellite/affiliates companies paying for retransmission rights who will see their cord cut or ad dollar fall as even basic TV becomes available through an online distributor.

Furthermore, if the networks are all willing to agree on something like this(they never will), why not give it to Google or Amazon (NASDAQ:AMZN) (they will pay if it not fragmented) who have the scale and infrastructure or a collectively owned(assuming they all got on board) entity like a Hulu which they could control.

Mark wrote:

Of course once they get the broadcast nets, how long until they add the cable nets like ESPN, Disney (DIS) ... etc. ?

I am guessing this statement is hinting something along the lines of what HDNET is thinking of doing with NFLX. Problem is if I am HBO I do not go down this route. My content is viewed by most as the most high quality out there. It is worthy of a significant premium. If I extract a significant amount of money upfront from NFLX to license it, it comes at the cost of potentially losing control down the road and eroding the value I extract from my subs. Maybe this ends up being a losing proposition. So, why let you in the door in when I can find ways to monetize that are more optimal and more profitable if I remain long term focused?

Further:

Their competitors have to figure not only how to overcome the technical hurdles of reduced available bandwidth, but also a business model since no one will want to give content away for free when Netflix can pay them. Netflix is very smart.

Now, I agree with the bandwidth argument being made from a short-term perspective, but I don’t get the business model argument. Cuban is arguing that Netflix eventually becomes just like an online TV channel. If that is the case, its competitors are not potential subscription streamers, but rather broadband providers, cable companies, and satellite companies.

The nature of the space ensures it remains fragmented enough that this never happens. Companies like Comcast (NASDAQ:CMCSA) and Verizon (NYSE:VZ) our counting on bundling to increase profitability. A $9 a month Netflix is a threat to all of them, and they have invested heavily in infrastructure.

For NFLX to make any money the cost of the online subscription, that is assuming it provides on par content to offline, will rise while that of the offline falls. Where they converge is your equilibrium. He is also ignoring the overlap between distributors and content owners in cable. Netflix boosting short-term profits at the cost of eroding the value of their own subscription services doesn’t seem to factor into his analysis.

Netflix should end up as the only “TV” provider that truly works on the internet, Which means that content providers like the broadcast and cable networks can be paid by Netflix on a per sub basis for their subs who want to subscribe via the net, and from traditional TV providers for those who want buffer free, (relatively) full quality TV the old fashioned way.

Couldn’t agree more. But that means the Netflix subscription needs to go up rather significantly to offset the cannibalization this will bring to broadcast and cables current revenue streams. At which point the value proposition of the Netflix subscription which currently is benefiting from FAT cable fees starts to decline.

Netflix becomes no more than an internet access point to the same TV/cable content. In which case, why not just watch TV? I mean you said it yourself internet bills are going to go way way up as isp’s start investing in infrastructure to duplicate what can already be piped in via cable or satellite.

If you ask me, Netflix has come in at low price point with respect to streaming. It is a smart move for them to the extent that they were able to get a few big content providers in longer term deals. With that accomplished they can let the disruptive engine go to work.

But it seems we are already seeing some players wise up to this. I see the content providers eventually waking up and realizing that nflx window should be significantly postponed if they don’t want a mess on their hands. This means down the road, if Netflix is going to become what you think they should be, they will need to significantly raise the cost of their streaming service ... that won’t be good news.

Disclosure: No positions