Hollywood Hates Netflix, Hollywood Loves Netflix

One of the things I love about Silicon Valley is how connected it is. In the past two weeks I casually met with a former Hollywood studio senior manager, and a Netflix insider. It was an opportunity to find out what they know that I don't -- and it's usually a lot! Since I'm a recent Netflix Instant Streaming convert, I asked them both about it, and what I found out was interesting. According to the former studio guy, "the studios hate Netflix." According to the Netflix insider, "the studios love Netflix." And, according to both of them, it's all about money. So what gives?

When I asked my ex-studio friend about Netflix, his reaction was nearly instantaneous and visceral -- "Do you know how much the studios hate Netflix?" According to him, the issue is that Netflix "hides behind" the "first sale doctrine" resulting in lower revenue to the studios. The "first sale doctrine" refers to US law that allows copyrighted material to be transferred after it's been purchased so long as no additional copies are created. What that means is that Netflix can legally send me a DVD disc in the mail, then get it returned and keep circulating it as long as they want without paying the studios any more money. That's different from say a pay-per-view movie, where every time someone watches it, the studios get a cut of the revenue. OK, I can see why the studios wouldn't like that, but then it's not like Netflix made the rules -- they just built a system to capitalize on them.

So how is it my Netflix contact can claim that the studios love them? Well, to start with, according to him, it's not about how much money the studios make on each viewing, it's about how many viewers Netflix brings to more obscure content. He claims Netflix is so good at learning what you like, that they can sell you the "long-tail," or lesser-known content, and you'll love it. So, the upside for the studios is that they can make money with movies and TV shows that would never sell on an end cap at Walmart or Circuit City, because Netflix has to tools to find just the right people to watch them. Not only does this grow the market, but it also helps up-and-coming artists find an audience. You might be great at making shows that appeal to 1% of the viewing audience, but no one will ever know if you have to get approved by a Walmart buyer first.

The one thing they both agreed on is that it's all business, and it's all about money. If Netflix (or anyone else) builds a service that has lots of viewers, paying lots of money, with enough allocated to send to Hollywood, the studios will find a way to provide their content. Today, Netflix Instant Streaming content library selection consists mostly of older TV shows and movies, and in some cases, it's clear that it's "teaser" content. For example, you might get episodes 1 to 4 out of a series via Instant Streaming, but then have to watch concluding episode 5 on DVD. From a studio perspective, that ensures that Netflix still buys the DVD, but it definitely compromises the consumer experience. So what would it take to have a richer library, or one without these kinds of compromises? The answer is simple -- money.

Today, Netflix Instant Streaming is bundled with a DVD rental service, so you could argue that the end-customer isn't really paying anything for it. In contrast, the other "all-you-can-eat" video-on-demand services are either ad-funded (e.g. Hulu) or come with fairly large monthly bills (e.g. Cable and Satellite TV). What will be interesting to see is how this evolves over time. In the past, cable and satellite justified their rates by arguing that it was expensive to build and maintain their distribution networks. Now that standard definition TV can be readily delivered over broadband cable, and HDTV will be in the near future, the line between traditional video services, and Internet streaming services has begun to blur. So regardless of any love-hate relationships, I'd place my bets on the most efficient delivery systems -- after all, it's all about the money.