Netflix's evolution from mail-order DVD business to streaming video provider is igniting the off-network syndication market. While Netflix is grabbing all the headlines, the entire online videoon- demand marketplace is expanding exponentially, with providers such as Amazon Unbox, Hulu Plus, and Walmart’s Vudu all entering the business. Those providers all fall under the category of subscription video-ondemand (SVOD), but other online services—electronic sell-through such as iTunes or Time Warner’s TV Everywhere initiative—also are turning up the heat.
“We have a better marketplace right now as a result of the online providers,” says one distribution executive who requested anonymity. “The cable networks have to protect their turf. They have to have strong off-network content to launch originals and to maintain the subscription fees they are getting from the [cable operators].”
“What’s so interesting about these new competitors is that they are either competitive with the cable networks or additive to them,” says Scott Koondel, president of distribution for CBS Television Distribution and senior VP of corporate licensing and distribution for CBS Corp.
Netflix made a splash in early April when it acquired rights to Lionsgate’s critically adored Mad Men for approximately $900,000 an episode. While that’s a low price by basic-cable standards—CBS Television Distribution’s Hawaii Five-0 just sold for about $2.5 million an episode to TNT, including online streaming rights— it’s a good take for a highly serialized show that might not have had any afterlife on cable at all.
Last year, Warner Bros. sold its off-FX drama Nip/ Tuck to Netflix in a four-year deal for $175,000 an episode, and allowed Netflix to share the show with gaytargeted cable network Logo. That’s another example of a show that didn’t have much future on basic cable but is a good fit for SVOD, in which people tend to want to consume entire series, episode after episode.
Netflix is so committed to acquiring original and offnet fare to grow and maintain its subscriber base that last week it took a stock-price hit when the company’s management told Wall Street that they expected cashflow to tighten as Netflix spends more money to acquire content. So far, that strategy appears to be working: Netflix’s customer base expanded by nearly 70% from first-quarter 2010 to first-quarter 2011. Netflix declined to comment for this story.
But Netflix isn’t the only game in town when it comes to online streaming rights. Time Warner is negotiating rights to stream all acquired shows on its TV Everywhere platform, which gives Time Warner Cable subscribers anytime, anywhere online access to their cable subscriptions.
While SVOD is considered a different window than a cable-affiliated service such as TV Everywhere, both entrants into the market are adding competition and thus driving the prices of some off-net and library programming up. And in some cases, SVOD services are teaming with cable networks to add money to the pot and improve the chances that they’ll win the acquisition.
Content providers especially like this evolving model because they don’t see SVOD as taking subscribers away from existing services, which means that both segments of the business will continue to fight for acquisitions and keep prices high.
“I don’t think this is a threat to pay cable or satellite because people want big events, they want sports and they want the DVRs that come as part of these services’ set-top boxes,” says another top distribution executive. “The average person wants baseball, football and the Olympics. If you don’t have cable, you are losing out on all of that. Netflix becomes an add-on service for people who are looking for particular kinds of stuff.”
This new market is just getting off the ground— somewhat replacing the once-booming DVD business that preceded it—but already people are wondering how long it can last. “The challenge is ultimately going to be, once digital becomes more pervasive, once consumers change their behavior, how much will these off-net deals be worth to 24/7 cable networks versus selling these shows into the digital arena,” says David Sanderson, head of Bain & Co.’s global media practice.
Sanderson also worries about what streaming video deals mean for the increasingly difficult proposition of getting advertising in front of viewers. “Big marketers love the TV platform because it’s the most compelling way to engage with the customer,” he says. “But you have to get the customer to consume it. With DVRs and ad-skipping, consumer engagement is declining.”
Still, others are looking forward to riding this newfound wave, which looks to have only just begun.
“People like to consume content, and they are consuming it in all of these different places,” says the top syndication exec. “I’ve never seen the marketplace so healthy.”
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