Why Netflix Will Control “Big Telecom” (or die trying)

There are only two viable scenarios that will come to pass in the near future when it comes to home entertainment. Either Netflix and its 20 million users will force a paradigm shift in the way Big Telecom delivers entertainment or they will be hit so hard by regulations, increased licensing fees, and pay-per-gig throttling of broadband that they’ll have to change almost every aspect of the way they do business.

This happy world that we live in now where an affordable Netflix service co-exists with Big Telecom is not sustainable. Something has to give.

A recent article on the Washington Post speculates that Netflix is the biggest threat to an evolving telecom industry. The term “biggest threat” doesn’t do justice to what Netflix and other video-streaming services like YouTube, Amazon, and Hulu represent. This is their singular focus right now and they’ve taken the fight to Washington as well as the court of public opinion.

How Netflix Could Win

Despite a string of wins that include knocking out Blockbuster and other brick-and-mortar stores around the country, Big Telecom is coming in from a position of strength and growth. The different companies and components control the content and the deliver method (broadband) that Netflix relies on for their current and future business models. With reports that Netflix accounts for 20% of the broadband usage during peak hours combined with the lower rates they pay for getting “last dibs” on content distribution, a unified front put on by Big Telecom could easily turn Washington against them.

The keyword there is “unified.” They’re not. Some want to embrace the Netflix model at different levels of engagement and see it as a high-potential growth market that could cut expenses and increase overall profits.

“There is every reason to believe that between their market cap and public access to funds, Netflix is a buyer of content with big dollars,” said John Calkins, executive vice president of Sony Pictures Home Entertainment.

For every enemy that Netflix makes, they make another friend in the industry. They finally have representation in Washington that can help stave off regulations that would crunch their ability to deliver broadband movies at their current and future pace.

Even victories on these fronts won’t be enough. For Netflix to truly “win” this fight, they’ll need to get nearly everyone on board. To get nearly everyone on board, they have to continue to knock out the competition and make the telecoms believe that they can’t do better with their own variation of the service.

“There are many incentives to create hurdles for online video firms like Netflix,” said Parul Desai, policy counsel for Consumers Union. “They are going up against powerful media and Internet service providers who are trying to come up with their own Internet video strategies and could limit access to content and access to their consumers.”

It will be a hard fight as the list of competitors grows continuously. Their power lies in landing combo punches: the voice of the people must continue to ring true and they have to build their list of allies. Unlike the Blockbusters of the world, Big Telecom will not be bullied into submission, nor do they have to be.

If Netflix can stay profitable, continue growing, and avoid landmines set in Washington, they can win the battle and force Big Telecom to integrate or miss out on the huge opportunity that streaming broadband home entertainment has to offer. Some are already seeing the potential, bringing hope to the possibility of integration.

“What Netflix and other broadband distributors mean for us is another avenue of distribution for our content and brand,” said Philippe Dauman, president of Viacom.

It will take that sort of endorsement to make this a happy ending for Netflix.

How Netflix Could Lose

At a market-cap of $11-billion, Netflix is a spec of a company compared to those they’re fighting. There are dozens of major obstacles in their way and they must overcome most of them to avoid the “die trying” scenario. Some of the biggest challenges include:

• Government Regulations – At the rate of consumption that Netflix represents, a very easy case can be made in Washington that without regulations, they will either have to universally raise prices or throttle broadband more than they are. Both scenarios would be huge blows against Netflix and could shift public opinion.
• Suspension of Program Licensing – Today, the telecoms who play with Netflix view them as an additional revenue source, the last in line to pay for movies once video and other distribution sources have passed their peak. If they want to play hardball, they simply have to suspend their agreements and pull content from the Netflix libraries. The model that Netflix enjoys relies on others producing and licensing content – without it, they have nothing to offer.
• Well-Financed Competitors – YouTube and Amazon are just the start. Many telecoms are working on their own models. All of them have more money to spend and less dependency on the revenue, so they could undercut Netflix on pricing. This alone is not a huge roadblock – Netflix has a huge lead on anyone that steps in – but it could slow growth long enough to do damage.
• Time-Warner Cable – The belief that CEO Glenn Britt holds regarding Netflix being a middleman that will soon “go the way of Blockbuster” is a larger obstacle to overcome than it seems. That single statement will hold sway over many chief executives in the industry and slow Netflix’ ability to win allies.
• The Music Industry Example – Offering an inexpensive model to deliver quality entertainment in a convenient way has already sent one industry into the gutter. Would adoption of a similar model for videos do the same thing to television and Hollywood? Until it happens, it’s hard to prove that it won’t hurt the industry. This has many in the industry terrified by the prospects.

For Netflix to reshape the industry, they’ll need to play ball with the telecoms and have most of the telecoms play ball with them in return. The future of television entertainment is emerging right before our eyes. Technology will play many roles to guide the direction of the industry, including a need to improve broadband Internet distribution. Hardware advancements appear to be preparing for the convergence of television and Internet entertainment into single components.  It all points to one conclusion.

Internet-streaming entertainment will eventually be the norm. Whether Netflix is the continuing leader or the fallen trendsetter has yet to be determined.