There’s plenty of speculation about whether Web broadcasters like Netflix can really beat the cable companies. Some people see “cord-cutting” as an irreversible trend driven by a demand for convenience. Others see it as a short term cost-saving exercise driven by a downturn in the economy. Perhaps instead of asking whether Netflix and its peers can beat traditional cable, we should ask if it would be a good thing if they did. Can Netflix actually afford to produce great TV shows?
The Web-based model is clearly attracting a lot of attention. Netflix is facing competition from Hulu Plus, Amazon Instant Video, and the Verizon-backed RedBox Instant. There are also on-demand services that only existing cable customers can access like HBO Go and Comcast’s Xfinity. You can even access content on demand using iTunes or Google Play.
Reports, like this one from Parks Associates, show a steady increase in online content consumption. They focus on the growing smart TV trend and show that 56 percent of smart TV owners are now connecting to the Internet and 75 percent of them watch on-demand movies at least monthly. Those figures will grow as more and more smart TVs ship.
While traditional TV sets may be slow to adjust, people have been quick to use their laptops, tablets, and smartphones instead. A recent study from Performics reported that “55 percent say they watch TV, movies or video on their computer at least once a week, while 29 percent watch on game consoles and 28 percent watch on mobile devices.”
How successful is Netflix anyway?
For all the talk about the shift to services like Netflix the bottom line isn’t that impressive. The second quarter results for Netflix show 23.9 million U.S. streaming subscribers, 9.2 million DVD subscribers, and 3.6 million international customers. That generated $889 million during the quarter.
Netflix viewers apparently watched over one billion hours of Netflix video in June 2012 which works out as a higher average amount of content consumed per day per person than the cable companies during the same period. However, while that seems like an obvious measure of success, it doesn’t actually translate to higher profits. There’s also evidence that kid’s TV is driving Netflix success.
Comcast won’t release second quarter results until August, but its first quarter results showed revenue of $14.8 billion. It also recorded just over 22.2 million video subscribers. To compare directly, Netflix generated $870 million in revenue in the same period despite having more subscribers at 23.4 million. Comcast also records 18.5 million high-speed Internet customers and 9.5 million voice customers, but even taking that into account the amount of money it generated compared to Netflix is huge.
The news that Amazon is joining Netlfix, Hulu and Google by commissioning original TV programming has been widely discussed as yet more evidence that the Web broadcasters are squaring up to the cable companies. What you have to look at, though, is the amount of money they can afford to invest in creating content compared to a company like HBO.
Netflix kicked off with Lilyhammer which seems to have been favorably received. Next up it secured a new season of Arrested Development by bidding a reported $3 million per episode. It is thought the budget is around $4 million per episode for the adaptation of the BBC series House of Cards.
Compare that to reports of HBO spending $20 million on the pilot of Boardwalk Empire and then around $5 million per episode. How about the $10 million it spent on the Game of Thrones pilot followed by $6 million per episode. Can Netflix and its peers compete with that?
It’s also important to consider how much they’ll make from that content. HBO has done extremely well with a high cost, high quality approach. There was a campaign to persuade HBO to offer its content as a standalone service for a monthly fee and it got a definite negative response. That’s because HBO makes more money by selling the content as exclusive to the cable companies.
If the original programming route works out for Netflix it could end up as just another channel on cable because the executives want maximum return on that investment. The Chief Executive, Reed Hastings, said as much back in March according to Reuters “It’s not in the short term, but it’s in the natural direction for us in the long term. Many (cable service providers) would like to have a competitor to HBO, and they would bid us off of HBO.”
Comcast was quick to shoot the idea down.
Where is the quality?
As a cheap proposition Netflix is an attractive service. The streaming technology works well and the lack of adverts is great, but is that enough? Imagine living with Netflix alone. The vast majority of the content is old. The best offerings are TV shows like Breaking Bad and Sons of Anarchy. Apparently Netflix had to pay around $1 million per episode for Mad Men. The high cost of securing TV shows is part of the reason for their foray into original programming – it might represent a better ROI.
If we look at a sitcom like The Big Bang Theory the picture is even bleaker for Netflix. Warner Bros. reportedly made about $2 million per episode selling it to TV stations and TBS and then expected to make another $2 million per episode in barter ad sales. That’s $400 million for 100 episodes. Netflix has no advertising and it can’t afford to pay that kind of money. I’m not even going to get into sports.
When we take a look at the movies things get even worse. The loss of Starz was pretty disastrous. The limited library of movies on Netflix is awful compared to cable offerings.
What do we want?
I would prefer to pay less for entertainment. I think everyone would, but when it comes down to it, what I really want is the quality content on cable in an on-demand format, alongside the back catalogue that services like Netflix offer. If I have to pay more for it then I will.
There’s obviously room in there for cable companies to cut their prices without compromising great quality content. Hopefully the success of Web broadcasters will drive them to provide better online access and more reasonable pricing, but you can’t expect the finest entertainment lineup for the prices that Netflix charges.
Ultimately, that old saying, “you get what you pay for” still rings true.
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