They're an aggregator. I can pay Netflix one monthly fee and watch content from multiple different content providers. Customers going direct to the content providers would require dealing with them each individually, paying multiple bills, etc. The convenience of that gets them customers, the existence of paying customers gives them leverage when negotiating for exclusive licenses with content providers. Locking up exclusive licenses gets them more customers and creates entry barriers for competitors, repeat ad infinitum.
It's kind of like saying: "I don't get eBay's business model. It's so thin. Distribute other peoples' products from other peoples' facilities using other peoples' trucks."
EBay's trick is that they connect (big number) buyers with (big number) sellers, and take advantage of network effects to stay ahead of the competition. In Netflix's line of business, the number of sellers is very small and well-known (a handful of large studios own almost all the valuable content).
Exclusive licenses do indeed keep them ahead of competitors, but why would content owners give them an exclusive license? Netflix's leverage over content creators is their customer base, but that seems so thin to me when it's so easy to just sign up for another streaming site. My wife and I have a few subscriptions (Hulu, Netflix, Amazon Prime), and if say Paramount started their own service, it wouldn't be a big deal to add another one to the list. It seems like the studios have all of the leverage in that relationship, and a lot of incentive to cut out the middle-man.
Their hope for the future is that the sellers are also middlemen. The studios/networks distribute and in some cases finance the content, which is largely produced by production companies (which often represent independent contractors, aka Talent).
The game Hollywood talent is starting to play is to flirt with companies like Netflix as sources of financing and distribution in order to play them off the studios. Talent benefits from more players on that side of things, which is why Netflix is able to get someone like Kevin Spacey (whose production company is quite forward-looking).
Netflix has a lot of cash to throw around, even by Hollywood standards. So far they're using it pretty intelligently, in a long, broad game.
They had an aborted earlier attempt with the DVD business to do something similar, Red Envelope. That was going to be their own distribution company. They were in here LA for a couple years, but from what I saw of them, the people running it were the wrong people. I think they've found the right people for their content business now. Seems to be working well, anyway.
They're also playing their strengths well, doing series instead of motion pictures for the most part. Series are binge-able, and that's something they have the networks and studios don't.
It's my perception that Netflix sort of triggered the start of binge watching as a phenomenon when they bought Lost for $40 million. There was a cohort who binged through that and talked about it, and then that got the idea out there. Then Breaking Bad was an interesting example when binging on Netflix and Amazon sort of retroactively moved the show from cult to huge.
They have lost exclusive distribution partners in the past, most notably Criterion (who went to Hulu) and Starz! Those hurt them, but they seem to be coming back from it.
> Exclusive licenses do indeed keep them ahead of competitors, but why would content owners give them an exclusive license?
In exchange for money?
> EBay's trick is that they connect (big number) buyers with (big number) sellers, and take advantage of network effects to stay ahead of the competition. In Netflix's line of business, the number of sellers is very small and well-known (a handful of large studios own almost all the valuable content).
> My wife and I have a few subscriptions (Hulu, Netflix, Amazon Prime), and if say Paramount started their own service, it wouldn't be a big deal to add another one to the list.
For Paramount to release their own service, they would have to pull their content from Hulu, Netflix and Amazon or no one would have any reason to use it. So they would have to spend big money on marketing only to regain the revenue lost by pulling their content from the existing distributors. Then they would have to build their own distribution infrastructure, code and maintain apps for different brands of smartphone and smart TV, etc. Why would they want to incur all that expense instead of just trading content for cash with the entities that have already done it?
I think you miss my point. If I'm Viacom, I want to capture as much of the user revenue as I can. And I hold all the cards--the user is very particular about watching my content, but probably not that attached to Netflix being the distributor. So it's in my incentive to extract as much of Netflix's margin as I can in return of granting an exclusive contract. If they balk, I can always set up my own distribution system, because I already have a huge marketing infrastructure, and because Amazon is renting out the actual hardware/bandwidth wholesale. Or I can license my content to an upstart Netflix competitor that charges (small dollar value) less. If customer's aren't particularly attached to Netflix per se, this competitor will quickly see users switch. Netflix is in a much weaker position. It can't easily replace my content if I pull it.
I guess it works out for Netflix if users place a really high value in being able to get all their content from one place. At least watching my friends, who subscribe to a bunch of streaming services, I don't know if that assumption is a really great one.
That might be true, but you're discounting how hard it its to actually distribute video well over net to multiple devices. If Viacom goes it's own way, it has to regenerate all that capability.
Also, as as user, I've stayed far away from video content hosted by the big studios. They can't seem to keep their own executives from crippling access to their product - it almost seems like they need a Netflix to prevent themselves from overreaching to the point that it's a big customer negative.
Netflix isn't in all that weak a position if a given content holder withholds rights. For me anyway, Netflix already offers programming in excess of my time to consume it. As long as other quality content is available, then other content providers will end up getting that revenue.
> If I'm Viacom, I want to capture as much of the user revenue as I can. And I hold all the cards--the user is very particular about watching my content, but probably not that attached to Netflix being the distributor.
Again, Netflix has a lower marginal cost for distribution than the content producer because their fixed costs can be amortized over more than one content producer and the marketing expense of convincing customers to sign up for the service is a historical cost for Netflix but a future expense for the content producer. Simply put, Netflix is more efficient at converting content into money than the individual content producer.
> Or I can license my content to an upstart Netflix competitor that charges (small dollar value) less.
The upstart Netflix competitor has the same problems as the internal studio distribution endeavor. They would have to duplicate all the costs Netflix has already paid. Meanwhile they would have to outbid Netflix for content from the studios. So the new Netflix competitor would have to spread their distribution costs over less content while paying the studio more money and yet charge lower prices. Who is going to enter the market under those conditions?
> Netflix is in a much weaker position. It can't easily replace my content if I pull it.
Why not? If you won't sell them distribution rights for X-Men then they can use the money they didn't pay you to buy distribution rights for Batman from the other guy, or produce more original content like House of Cards.
Right, but whether that function is valuable depends entirely on Netflix's negotiating leverage. The more content companies wise up to the internet, the less leverage Netflix has. The content companies have every incentive to either cut out the middle-man and offer their content directly over the internet, or play the middle-men against each other, cutting their profit margins to the bone. The distributors have no leverage--what are they going to do, threaten not carry Viacom's content?
It's very different from EBay's situation, where sellers have no practical way of identifying and reaching customers themselves, and risk getting lower sales' prices if they go with a competing auction site because of the network effects EBay brings to the table.
I'm sticky to Netflix. I don't want to subscribe to a bunch of different services. If you make your stuff usable on Netflix, you can have some of my money. Otherwise you can't.
It's true that I'm not locked-in strongly, but there is some stickiness there.
It's kind of like saying: "I don't get eBay's business model. It's so thin. Distribute other peoples' products from other peoples' facilities using other peoples' trucks."