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As Ben Fritz writes with respect to the demise of home media sales and the transition towards digital delivery:
After desperate attempts to prop up the industry's once-thriving DVD business, studio executives now believe the only hope of turning around a 40% decline in home entertainment revenue lies in rapidly accelerating the delivery of movies over the Internet.
In the next few years, the growing number of consumers with Internet-connected televisions, tablets and smartphones will face a dizzying array of options designed to make digital movie consumption a lot more convenient and to entice users to spend more money.
Thusly, movie companies have moved to enter into favorable agreements with certain online subscription providers:
As Amazon.com Inc. bulks up its streaming video service with movies and television shows from 20th Century Fox, embattled market leader Netflix Inc. has closed an exclusive agreement to offer films from DreamWorks Animation SKG Inc.
And further:
The deals also demonstrate that many Hollywood studios are now just as happy to sell distribution rights for their films and TV programs to Internet companies as traditional television channels, provided that they can make more money.
The above provides proper context for The Angry Drunk’s following explanation for the separation of Netflix’s streaming and DVD business:
The answers to these questions, and I believe the driving force behind the Netflix changes all involve one group: the content providers. The tech press sometimes seems to think that distributors like Apple, Amazon, Netflix, Redbox, Blockbuster, etc. just pull this content magically out of their asses. They ignore the fact that there are powerful movie studios and record labels that are obsessed with maintaining control over their product distribution and are scared shitless over digital distribution. How soon we forget that a major Netflix content provider, Starz, recently told Netflix to piss up a rope and took their ball home.
The story goes: movie studios have seen their revenue from home entertainment media sales fall off a cliff; during the same time, Netflix nurtured a successful subscription service through streaming content and DVD mailings; movie studios realize their best interests lie in digital content delivery and have sought to re-price their licensing agreements with online providers; Netflix, in turn, having no choice, enter into these contracts and pass the costs to its customers; these very customers react negatively to the price increases and leave en masse; in order to clarify their long-term strategy Netflix announces it will divide its streaming service (Netflix) from its DVD mail service (Quickster), further angering its customers.
Netflix has lost 600,000 subscribers and 50% of its market cap—a heavy price to pay for a licensing fee squeeze inflicted by its content providers. Instead of re-aligning their financial expectations with respect to these alternative distributors, the movie studios have choosen to treat Netflix as an “old-school distributor.” As Michael Pachter, an analyst at Wedbush Securities, predicts: “Netflix’s streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012.” Of course, the movie studio expectations are that customers have buckets full of cash ready to throw in their laps with Netflix and other online providers acting as the toll collectors. Taking such an aggressive position has only resulted in the erosion of Netflix’s brand value. On Twitter and elsewhere, people speak of Netflix in the past tense.
The recent deal with Dreamworks may well re-spark life into Netflix, but it starts two years from now. Which is enough time for its customers to find alternatives. Or, it may just be false-flag spin to reassure investors that it is still a player in this online digital delivery game. Nevertheless, whether Netflix survives independently or is absorbed by Amazon is irrelevant, since the only true players in this game are the movie studios who are hell-bent to make sure delivering digital content that people actually want to see is as difficult for everyone as trying to find a video rental store.