Starz was, in essence, a reseller of Sony Pictures movie library, and the pitfalls of using the company were seen when Netflix viewers over-watched Sony content and breached a viewing cap. Many popular Sony films inexplicably fell off the streaming service in 2011. Why pay up for that lack of control?
In the panel with Weinstein, Sarandos articulated Netflix's new party line when it came to paying for movies and TV shows for the streaming service. The company would no longer negotiate deals with resellers and non-exclusive intermediaries and would instead go directly to the source for exclusive content. Disney, DreamWorks and now carriage of first-run TWC movies are indicative of Netflix new strategy.
Clearly, Weinstein liked what he was hearing. Netflix will now replace Showtime, another intermediary, in streaming first-run TWC films.
Sarandos explained that Netflix would also invest in its own content, a move that appears effective at channeling the company's proprietary insight into subscriber viewing habits into targeted content that grows overall subscriptions.Consider Netflix's stable of original programming such as House of Cards, Hemlock Grove, Arrested Development and Orange Is the New Black. Those shows could easily be stereotyped as appeasing to very specific audiences who would consider the service: media-savvy nerds, hipsters, and college-educated young women. In Netflix most recent earnings, the company said it would also begin looking at adding its own original documentaries to the service -- so to continue the stereotype -- add over-educated elitists to the list of possible interested new subscribers. Original content may also be increasing the company's bargaining power, giving it the ability to walk away from expensive deals. Where Does Netflix Now Stand? Netflix clearly won over Weinstein with its vision for tailored content, a move that appears to be adding new stability to independent and documentary filmmakers who produce movies beyond the serialized money-makers that drive Hollywood profits. Of course, the question is will it work? It appears Weinstein's promotion of independent film and Netflix's focus on selectivity are a strong marriage. Netflix has posted two strong quarters of earnings that show its subscriber base growing along with its bottom line. The company's strengthening financial position makes it a true media industry power broker, where other services like Hulu and even Amazon Prime seem more speculative. Some investor concerns, such as accounting for the costs of original content appear to be less of a risk than many -- including myself -- had feared. As Netflix scales its user base, the amortization expense of original programming isn't yet drowning out the company's profitability. Netflix did say it is continuing to hammer out exactly how quickly it will amortize costs and investors should continue to study the strategy in coming quarters. Even though some like to treat Netflix's streaming content obligations, which presently sit at nearly $6 billion as a bogeyman for the company, recent earnings show that those commitments and their amortization are scaling nicely with revenue from a rising subscriber base. Gross margins have risen in recent quarters even as Netflix various content commitments hit the company's bottom line.
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