Disney, Comcast And Time Warner: Taunting And Toying With Netflix, Other Middlemen

by: SA Editor Rocco Pendola

On Wednesday, I wrote about the landmark deal Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA) struck to make loads of Disney programming available to Comcast cable customers via multiple platforms. It's not only worth reviewing that press release, but looking at the additional information uncovered by The Wall Street Journal:

Perhaps most important, though, the Comcast-Disney deal paves the way for ABC to be streamed live on the Web behind a wall, accessible only to cable subscribers, according to people familiar with the deal. Online replays of TV shows could be restricted to such subscribers for a limited time after the shows air, too, the people said.

According to the Journal article, Disney is setting the groundwork to stream "recently aired ABC shows" to cable and satellite customers across the country.

That's strike one (at least in the last 36 hours) for Netflix (NASDAQ:NFLX).

Jeanine Poggi of TheStreet.com relayed strike number two via The New York Times in an article published Thursday:

According to The New York Times, the cable network will no longer offer Netflix deals on DVDs. Netflix will now have to pay retail price instead of wholesale for physical copies of shows like True Blood and Boardwalk Empire ...

The only way for Netflix subscribers to watch HBO content via the service is through physical discs, as Netflix doesn't have the rights to stream content from the cable network.

Later Thursday, Time Warner's (NYSE:TWX) Warner Bros. segment announced that it has doubled the amount of time Netflix, Coinstar (NASDAQ:CSTR) and Blockbuster (NASDAQ:DISH) must wait before renting or selling new movie releases to customers.

More specifically, and I don't know the guy, though I did send him an email yesterday, I think this is Time Warner CEO Jeff Bewkes' way of punk-slapping Netflix CEO Reed Hastings yet again.

You want to dilute our brand and compare Netflix to HBO, Reed? Fine, we'll make you pay more for the only stuff we're willing to sell you in the first place. The apparently unrelated new release delay stings not only Netflix, but the other middlemen and impacts new movies, not HBO programming.

By now, it's beyond obvious why both of these moves just intensify Netflix's death spiral. But, I've covered that from every angle possible, plus if you can't understand it without an explanation, you can't understand it with an explanation.

Between the two stories, the Disney-Comcast collaboration has, even apart from the Netflix connection, the most meaningful and wide-ranging implications. Right now, it's quite hipster to subscribe to the notion of cord-cutting. It's the cool thing to do. Of course, so many people who yack about this apparently emerging phenomenon do so without acknowledging the flaws of survey research.

The semi-hip Peter Kafka chimed in on the subject in an All Things D article, citing a Deloitte study that shows 9% of cable subscribers dumping their service to, so they say, watch their shows online:

Click to enlarge

There's a concept in survey research, known as social desirability. Simply put, it's the tendency of survey respondents to under-report undesirable behavior and over-report desirable behavior. You can control for this, using a social desirability scale, but I'm inclined to believe that Deloitte did not.

People tend to care how others view them from social perspectives. It's so much more desirable to report that you gave up cable to watch your shows online than it is to say you did because you're poor, lost your job and had to decide between cable and food for your family or shoes for your fifth grader. It could also be less dire than that. It's just socially desirable these days to say that you cut the cord, even if you have not.

I'm not arguing that this explains away the 9% statistic, but, as Kafka points out, there's probably much more to it. It's highly unlikely that Deliotte's descriptive results paint a complete picture.

Endpoint - I think lots of people, including Reed Hastings, are jumping the gun on cord-cutting. Sure, it's happening. But, families are not huddling around their iPad or Kindle Fire to watch "television." And they're not beaming the web to their big screens in massive numbers just yet.

The programmers and big cable companies still hold the cards, as Disney, Comcast and the many other old guard members who have hooked up and will hook up in 2012 continue to prove.

First, they either own or create and have the cleanest access to not only fresh movies and television shows, but to the real bread and butter - live sports programming and content of that ilk. They're entrenched in a multi-billion dollar advertising model that's not going anywhere anytime soon. Just look at what companies pay to place an ad during the Super Bowl; it keeps going up.

Pursuant to that, the old guard programmers and operators are coming around, en masse, to what Time Warner Cable's (TWC) programming executive Melinda Witmer said early in 2011 when she won my heart:

I don't know what a TV is anymore. It's kind of an anachronistic term.

-Melinda Witmer, The Wall Street Journal, 3/25/2011

Disney gets it. Comcast gets it. Time Warner and Time Warner Cable get it. Verizon (NYSE:VZ) even gets it. By not selling out, the owners of Hulu prove that they get it as well. That's all that needed to happen.

Content providers and deliverers had to do two things - adopt the multi-platform mindset articulated so cogently by Witmer and start effectively toying with Netflix like Time Warner's Bewkes does for sport and Starz (NASDAQ:LMCA) did when it gave the glorified bootlegger the old heave-ho back in September:

This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

But, again, beyond Netflix the evolution of TV Everywhere, with the significant Disney-Comcast partnership the latest big news, will serve as the end story in this battle. The war will likely never be over. There will just be different companies fighting it within the next couple of years.

I've got my money on more partnerships and some M&A between the programmers and cable and satellite companies and Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) emerging as the dominant third parties, so to speak.

Disclosure: I am long AAPL, VZ.

Additional disclosure: I am long NFLX June $40 put options.