After winning a decade long battle with Blockbuster, Netflix's troubles are still far from over. The company is increasingly facing heat for its rapidly growing success. In recent weeks, Netflix has been at the center of a war between Comcast and its service provider, Level 3. Today, more heat comes courtesy of Time Warner CEO Jeffrey Bewkes, who belittled Netflix and insinuated that its potential is overhyped.
"It's a little bit like, is the Albanian army going to take over the world?" Bewkes said in an interview with the New York Times. "I don't think so."
Bewkes' criticism isn't out of left field. Netflix's success hinges on licensing deals for content with media corporations such as Time Warner, and the more its library of TV and movies expands, especially online, the more likely consumers will be willing to cut the cable cords. This is an issue of particular concern of Bewkes, whose subsidiaries include a slew of pay-TV channels such as HBO.
Indeed, one agreement Netflix struck with Starz in 2008 had significant consequences, according to Bewkes. The deal only cost Netflix a paltry $25 million annually, and is seen by some experts as a big blunder by Starz, which gave up its valuable content for a small sum. But Bewkes sees damages beyond Starz's bottom-line, telling the Times that it could significantly impact the business model of cable TV.
"Why would anyone subscribe to Starz when they can basically get the whole thing for about nothing?" he explained. "That doesn't make much sense."
Robert Wiesenthal, CFO of the Sony Corporation of America, indicated that it's Netflix's transition to online offerings that has caused the issue. "When Netflix first came around, the dog was the discs and the baggie," he said, "and the streaming was the tail." But now, around 66% of subscribers stream content online—a huge shift in consumer behavior that will cut into DVD sales.
"Once you put it on Netflix, you really can't sell it anywhere else," Bewkes echoed.
Still, this may just be another case of old world media conglomerates struggling to come to terms with a new world order. Remember: Netflix started as DVD-by-mail service. Realizing the potential (and dangers) of the digital age, Netflix refocused its business model, adapted to the web, and struck deal after deal with content providers for online content. Hulu is following a similar path, and its expansive catalog of network TV shows is attracting subscribers.
Between Internet-enabled television, Boxee, Google and Apple TV, Netflix and Hulu, there's only so much old world media companies and cable TV channels can do to stave off the growing threat of the digital age. Under Bewkes' direction, Time Warner's HBO will eventually roll out an online service called HBO GO, and Bewkes hopes to push an industry-wide initiative called TV Everywhere, which would enable verified subscribers to access cable network content online.
Better late than never.
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