For Netflix, money changes everything

Business A Netflix charm offensive aimed at the media companies has been in full gear recently. For the past several weeks, Netflix CEO Reed Hastings has been everywhere that media-industry folks gather, giving interviews, appearing on panels, even appearing on the Charlie Rose show. And at each stop he has delivered the same message to media companies: We come in peace.

Netflix, Hastings insists, wants to be the media companies’ best friend. It doesn’t want to disrupt their existing revenue streams, it has no plans to try to compete with cable and satellite providers and it can hardly wait to pay the media companies a boat-load of bucks for their content.

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Hastings’ aim is clear: to take the some of the edge off mounting media company anxiety over Netflix’s rapid growth and its implications for existing movie and TV business models. And there are signs the strategy is working. In just the past week, CBS CEO Les Moonves and News Corp.’s Chase Carey have each expressed enthusiasm for doing business with Netflix after previously expressing either skepticism or outright hostility toward the company. Even Time Warner CEO Jeff Bewkes, who had made himself the poster boy for Netflix hostility, now claims to love him Netflix streaming and insists that “Albanian army” crack was meant to be “humorous,” because, you know they’re kidders, him and Reed. Always kidding around. Same with the “200-pound chimp” thing. Just kidding.

Whatever. In any case, Hastings’ sweet talk may not be the only factor at play in the media companies’ change of heart. The strategic use of Netflix’s checkbook has also probably been a factor.

Most of the really eye-catching (i.e. big money) deals Netflix has done recently, from “Mad Men” to “House of Cards, have involved TV content. While folks at the movie studios remain concerned that Netflix’s low-priced subscription streaming service is undercutting the transactional VOD business, their colleagues in the TV division have begun to discover in Netflix a new buyer for content that is otherwise-hard to sell, particularly basic cable series (for which other cable networks are reluctant to pony up for rerun rights) and serialized shows that don’t play well in the traditional syndication market.

Netflix is even starting to drive up prices for TV content it’s not actually buying. At the Digital Hollywood conference last week, Steve Mosko of Sony TV noted that TBS recently agreed to pay $2 million per episode for “Hawaii Five-O” rerun rights on the stipulation that there will be no Netflix streaming of the series for at least five years.

Clearly, word has begun to trickle up to senior management at the media companies that Netflix has its good side, too. As News Corp. COO Chase Carey explained to analysts last week, Netflix “has actually provided some truly incremental value,” for older TV content and content that is hard to syndicate.

Or, as Bewkes put it on the Time Warner conference call in response to a question about TW’s relationship with Netflix:

There’s been some utility for viewers in being able to get serialized shows that don’t play as well on traditional cable networks or in syndication.

And because SVOD monetizes some content that couldn’t be monetized before, and it monetizes some content better than it was monetized before, particularly the older library stuff, then it can add money to the ecosystem. And that’s good for everybody.

That’s not just monkey business.

Whether by happenstance or design, Netflix seems to have succeeded in driving a wedge between the movie and TV sides of the major studios. And it’s the movie units that could end up getting marginalized.

To the movie companies, Netflix’s subscription VOD service is a formidable and growing obstacle to establishing a high-margin electronic sell-through business to replace vanishing DVD sales. They would love to get tough with Netflix on licensing terms and even starve it of content to try to limit its growth.

Starving Netflix of content won’t be easy, however, when the studios’ colleagues in the TV division are happily providing it with high-profile programming. Worse for the movie guys, access to shows like “Mad Men” will do as much or more right now to drive subscriber growth for Netflix as would any particular slate of movies. And the bigger Netflix gets, the less leverage the movie studios will have.

In other words, the TV divisions of the media companies are actively contributing to the very growth of Netflix that threatens those same media companies’ movie studios.

Nor is there much the movie companies can do about it. For the TV units, the kind of deals they’re doing with Netflix right now largely represent found money. They’re licensing content that otherwise wouldn’t sell in syndication and pretty much all they have to do for it is cash the checks.

For a profit-center manager like the head of the TV division, found money is the best kind of money there is because it generally wasn’t previously budgeted for, it carries very little cost or risk and it drops directly to your bottom line — the line on which you’re paid. The TV guys aren’t likely to give it up just because the guys down the hall in the movie division are whining.