The Digital Skeptic: Netflix's Flat Fee Model Is Flat Broken

NEW YORK (TheStreet) -- It's not Reed Hastings' fault. With train wrecks as ugly as Netflix (NFLX), you can't just blame the conductor.

Because -- let's face it -- there is absolutely no business in offering all the world's movies, TV, documentaries or whatever, online for one, flat monthly fee. And this nuttiness was not Hastings' idea.

Everybody back in '97 thought the Web was magic. Never mind that when Netflix spun up, Web streaming was not what Netflix talked about. What it really did was co-opt a government-subsidized network called the U.S. Postal Service to send a steady stream of Hollywood DVDs to movie lovers, saving them the hassle of schlepping down to Blockbuster.

Except for the goofy moments, such as when Hastings told Fortune he wanted his company to be "like aspirin and not vitamins," I've always found him to be genuine.

And with the flash of 1 billion hours in video served up in July, 26 million some-odd subscribers and a stock price that topped $304 in the past 52 weeks, it's easy to be dazzled by the illusion of Netflix.

But the fact is Netflix -- and really most every Web streaming content operation like it -- was doomed from the beginning.

It's time we realized why.

The cost to stream a movie is not the cost to deliver that movie.
What Netflix, Hulu and the rest of the streaming content services always focused on was making it cheap enough to push a movie to a consumer over the Web. But the deeper complexities of creating a viable business over the new platform were ignored. With ugly consequences.

"Even with the rapid rate at which pricing has declined, 10 years later, companies are still struggling to figure out how to make money from online video," Dan Rayburn, an analyst at New York-based research firm Frost & Sullivan, said on Streamingmediablog.com back in 2010.

It turned out that the cost to stream was not anywhere close to the full cost to deliver. Delivering real movies to real customers was difficult and expensive.

"We've been telling our suppliers -- the various studios that we buy from -- that in the future, [Netflix streaming deals are] going to have a significant impact on what we're going to be willing to pay for programming or even bid at all," was what Phil Kent, CEO of Turner Broadcasting, told The Hollywood Reporter early last year.

Which opened Netflix up to a world of woe when dealing with its vendors, the studios.

"The current pricing ... is not really commensurate with the value that those kinds of availability are extracting," Jeff Bewkes, CEO of Time Warner (TWX) told Home Media Magazine last year.

That's Hollyweird speak for how studios are going hammer Netflix's bottom line. It's content costs are going to do exactly one thing: go up.

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