By the time Warner, Paramount, Fox and the rest had worked it out, Netflix was clear across the county line, meaning worth US$20b (it’s now US$70b, plus around US$20b in debt).
Competing with Netflix at that point (from around 2005) would have meant sacrificing revenue streams that were by then large enough to matter to investors, were they to be pulled.
That, of course, and the ego involved. Building a Netflix competitor involved working together, which was never going to happen given differing business models, capital bases and the like. Those that doubt need only look at Hulu, owned by Disney, Fox and Universal, which ten years later is a fraction of the size of Netflix, despite solid capital backing and impeccable studio connections. It didn’t do well simply because the shareholders couldn’t agree on how to run it.
In truth, Netflix has been preparing for this moment for years by building up its original programming – it is now the second largest producer of television in the US with a budget this year of US$5b, just behind Disney’s ESPN sports and ahead of CBS. So if the studios do switch off the programming laughs, Netflix hopes it will have enough in the can to keep it going for a while.
We don’t subscribe to that view. There are as many TV channels in the world today – and as many Netflix-type services – as there are broadband connections. By which me mean that just setting your browser to video and connecting it to Chromecast, Apple TV or even using an HDMI cable will provide an endlessly customisable video entertainment feed; your own tv channel, if you will.
Were the studios to focus, there is nothing stopping them from expanding Hulu or indeed their own film production businesses into something more like Netflix. ABC iView does, and so does SBS on demand, as does the TEN network. And Stan. There is no sustainable competitive advantage in video over broadband; it’s just packaging.
It is worth considering what Netflix would be worth shorn of tv rights from the Hollywood majors. Aside from MGM, all the studios are owned by public companies, so most big investors have access to a sum-of-the-parts valuations. In the case of the content assets of Viacom (which include Paramount studio, as well as the Nickelodeon properties, BET etc) the gross value is US$24b.
Sony, which owns the Columbia Tri-Star studio, is just one of the parts of a company worth US$48b – so its safe to believe the Columbia is less than half of this. The same exercise works for Fox.
It’s probably safe to say that it would be hard to get a content studio with a value of over US$25b. Netflix, as we noted, is US70b plus US$20b debt.
Of course, Netflix has been confounding the critics for years. Just as it outcompeted Hulu and the studios, it may continue to grow, nourished by a plentiful diet of its own rich content.
And the bulls also note that the industry which it is disrupting – network and cable tv – is just so large that there may be room for 5 or 10 big global players, with Netflix not even the largest (but the first, it is true). What this means is that the traditional network tv advertising funded model, and pay tv, is supplanted by a handful of global streamers who between them account for the whole pie.
For the record, Netflix’s business problems are not structural or even disruptive; it is facing simple competitive pressures as content makers of all types learn how to price their content streams on-line.
