The Old Guard Media: Putting Netflix Out Of Business

Oct.17.11 | About: Netflix, Inc. (NFLX)

I'm not so sure that Netflix (NASDAQ:NFLX) CEO Reed Hastings deserves the blame for his company's pending death. It might be more appropriate to classify his recent schizo moves as symptom of a business on its last legs.

In other words, we should not deduce a causal relationship between Hastings' errors and the downfall of the mighty Netflix. Instead, Hastings' latest moves amount to little more than a clueless series of responses to the reality I have been narrating all along - Netflix never had a chance. It's business model was never sustainable. Room in the space never existed for the company.

And, finally, the old guard media shows that it not only realizes this, but plans to act accordingly, from two angles.

First, of course, is the well-chronicled story of how companies like CBS (NYSE:CBS) and Time Warner (NYSE:TWX) continue to take Netflix to the cleaners, overcharging it for bottom-of-the-barrel programming, such as the (please, hold your roaring laughter) CW lineup. Programmers and movie studios pad their bottom lines and, I would guess, never expect to collect the entire amount of money their pacts with Netflix call for, as they, effectively, drive the company toward bankruptcy.

Second, I think the old guard is finally coming to realize something I've been yowling about for a while - there's no need for a glorified bootlegger/middleman like Netflix when you can do it yourself. And better. The recent decision by the old guard to not sell Hulu provides an excellent case in point.

Consider what I wrote about the prospects of a Hulu sale back in early September:

As I read it, Hulu's old guard media owners - News Corp. (NASDAQ:NWS) (NASDAQ:NWSA) and Disney (NYSE:DIS) - would rather let some Internet/tech/new media/consumer products company license content and take control of the user experience, ad sales and subscription model evolution as opposed to running the show themselves. The old guard has the future in the palm of its hands, yet it refuses to break out of its mold and own the future ...

Hulu should become the one-stop shop for online (and mobile) viewing of all video content, just like cable and satellite have become, as traditional delivery methods. It would benefit every programmer under the sun to become part owner of Hulu and provide its content to what would be a greatly-enhanced joint effort. And the cable/satellite operators could join on in a cross-promotional effort to keep both traditional and new content delivery systems alive while providing the opportunity to sell prolific advertising packages across platforms.

Handing the keys over to a Google or Amazon benefits Google or Amazon. It does nothing to serve the consumer of video content or the providers and traditional deliverers of video content, other than provide Hulu's owners and some programmers with a short-term revenue kick.

Consider this rough sketch. Visitors to Hulu would receive some free content, primarily the non-exclusive scraps that Netflix presently passes off as a "value" for $8 a month. It could then, much like cable and satellite, offer viewers a wide range of programming package options.

Simply put, I argued that the old guard should come to their senses, not sell Hulu and take control of their own programming. To his credit, BTIG analyst Richard Greenfield voiced that opinion first, as I noted in the original story. It borders on comical reading what Greenfield and I wrote in comparison to the Johnny-come-lately analysis of Wall Street analysts:

RBC Capital analysts David Bank, Ross Sandler and Ryan Vineyard predicted Hulu’s announcement just hours before. “We believe (joint-venture) partners News Corp., Disney and Comcast are increasingly viewing a sale of the Hulu asset as a Pandora’s box of potential channel conflicts and loss of control over the destiny of their networks’ own programming,” they wrote in a research note. “(NYSE:T)he broadcast networks could probably build greater brand equity in their own properties (online and offline) by retaining ownership of Hulu.”

It never made sense for News Corp, Disney and Comcast (NASDAQ:CMCSA). By keeping control over their own programming, they can keep Netflix from diluting it - remember that's a big reason why Starz (LSTZA) shunned Netflix - and they can offer it up via a platform that can easily overtake and shut down Netflix if the old guard gets aggressive.

As I noted back in September, the old guard should come together and make Hulu the go-to platform for streaming content. In effect, they can create pay-TV for the web and mobile, but with a plethora of relatively flexible programming packages at a reasonable price. It remains to be seen if the old guard has the wherewithall to pull it off, but by not selling Hulu they've offered more than a glimmer of hope.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.