The Deal: Netflix CEO's Bet on Content Depends on Who Controls It

NEW YORK ( TheDeal) -- What was Netflix Inc. ( NFLX) founder and leader Reed Hastings really trying to accomplish last week when he unloosed his vision for the video-streaming company?

a) Lull the cable portion of the pay-television firmament into a false sense of security.

b) Intimidate competitors and would-be interlopers into thinking Netflix already has the resources, scale and techniques to crush those intruding on its business model of "commercial-free unlimited-viewing subscription TV."

c) Bring even more transparency to a company that already celebrates having simplicity "at our core."

d) All of the above.

Answer: d) All of the above.

To arrive at this conclusion, it helps to contrast Hastings' "Long Term View," which is linked to Netflix's investor-relations site, with another white paper released last week, "Content Kings: The Changing Landscape of TV Consumption." This second paper, published by investment banking boutique Digital Capital Advisors, was prepared for a clientele described as "innovative media companies for whom digital is core to their DNA as well as those who would like it to be."

Its analysis, presumably agenda-free aside from a desire to win clients, differs markedly from Hastings' over the role of TV Everywhere -- the authentication system that allows cable customers, via passwords, to use any so-called 4-screen device (smartphone, tablet, PC/laptop or TV) for viewing the same networks covered by their cable subscriptions.

According to Hastings, "TV Everywhere will provide a smooth economic transition for existing networks." It'll be so smooth, he continues, "The same consumer who today finds it worthwhile to pay for a linear TV package will likely pay for a 'linear plus apps' package."

But that's not the way DCA sees it. "Seemingly unlimited amounts of new content now accessible online," the media bank contends, "has made the historic role of cable operators ... well, historic." Harsh words indeed, made harsher by the three to five "sustainable years" DCA gives the TV ecosystem as we know it. "Their DNA is simply incompatible with the evolving digital landscape of today," it says of a transition soon to be accelerated by the adoption of Smart IPTVs, "so it is just a matter of time before they are turned on their head."

What actually happens to cable TV's bundled packages will likely fall between the smooth transition envisioned by Hastings and the doomsday scenario predicted by DCA. It's also possible that, for a while longer at least, a certain video streamer wants to let certain sleeping giants lie. Hastings assumes more authority, however, when addressing barriers to entry that Netflix has already managed to erect. Although he doesn't call them barriers, that's pretty much the thrust of such declarations:

"We spend over $450M per year on global marketing to attract people to try Netflix, and to reinforce with our members why Netflix is worthy."

"We are currently spending about $350M per year on a wide range of efforts to improve our service and app, and we are constantly getting better." "We're now investing over $2B per year in content licensing and the creation of original shows."

While the quantity of these investments is enough to stop most would-be intruders in their tracks, Hastings also presents Netflix as a quality investor.

"We've realized that the 20th documentary about the financial crisis will mostly just take away viewing from the other 19 such docs, and instead of trying to have everything, we should strive to have the best in each category," he writes of insights gained over Netflix's 16 years. "As such, we are actively curating our service rather than carrying as many titles as we can."

These insights are also being applied to original programming, an area where Hastings admits there's more judgment involved. But he's confident all the same that Netflix's data on members' viewing habits and experience in licensing content give this original-content newcomer an edge over more traditional producers. Hence his opinion, "We think we can do as good or better a job than our linear TV peers in choosing projects and setting budgets."

DCA, for its part, appreciates Netflix's accomplishments but believes the digital transition has triggered a virtual land rush for content providers -- new and old alike. Its white paper notes that YouTube LLC has invested $350 million to create content in a campaign that will continue to fund the top 40% of programs so created. It also cites Google Inc. ( GOOG)'s giving Machinima Inc., the No. 1 entertainment destination on YouTube, $35 million in a recent investment round, as well as Discovery Communications Inc. ( DISCA)'s year-old acquisition of Revision3, another online television network with more than 27 million monthly unique users, for an estimated $30 million.

The bank then literally concludes its report with the assertion that, because of all the new "exciting avenues and opportunities in the world of content ... there is indeed room for many winners."

As for bringing more transparency to a company with simplicity at its core, Hastings clearly knows that one is not the other. He knows that simplicity in the context of Netflix means commercial-free movies and TV shows offered by a company "counter-positioned against the hassles, complexity and frustration that embodies most multichannel video programming distributor relationships with their customers."

Yet Hastings also knows that transparency would entail releasing actual viewing numbers to Netflix's $100 million "House of Cards" drama, to give but one example, rather than generalizing the data point to "huge numbers of members are just starting the series each week." And total transparency, come to think of it, would preclude opening this column with something as dubious as a multiple-choice question.

Written by Richard Morgan in New York