Richard Greenfield, BTIG equity analyst, has reviewed some recent changes in the Netflix “Long Term View” document, which is a handy guide to the way Netflix sees its “road map.”
Two changes stand out, in terms of relevance for understanding how Netflix sees itself in the ecosystem and how it ought to be viewed in the video entertainment business. Where Netflix used to say, “We are movies and TV shows,” it now says, “We are a movie and TV series network.”
“Network” is the key word. Netflix reasonably and typically is considered an “over the top” video streaming service, similar to Hulu or Amazon Prime. That’s a reasonable way to look at matters, given that the Netflix revenue model is “subscriptions.”
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But other entities also have a subscription revenue model. One might think of HBO and iTunes, neither of which is typically considered to be in the same category as a cable TV, satellite TV or telco TV distributor. Instead, HBO is seen as a programming network, for example.
And that points out the subtlety: Netflix “acts like a distributor” and also “acts like a programming network.”
That is unusual in the video subscription business. The dominant pattern today is that programming networks sell indirectly to consumers, using cable TV, telco TV and satellite TV distributors.
It would not be inappropriate to say that Netflix is the best example of what a programming network will substantially do (though not completely do) in the future, namely assemble content, and create a brand and revenue stream by selling direct to end users.
That is not to say existing distribution channels (cable, satellite, telco TV) will not be used, they just will not be exclusive channels. HBO, in fact, already operates this way in some Nordic countries where cable or other distribution infrastructure is insufficient.
HBO Go sells directly to end users, over the top, using Internet delivery. So, one implication of the new Netflix language is that Netflix sees itself as an HBO, a programming network supported by subscription revenues, not advertising.
The second change is non-specific language about the amounts Netflix might spend on original programming. Where Netflix originally said it would not exceed 10 percent of its revenues, the new language simply says such commitments will grow. A reasonable person might suggest that means Netflix will spend more than 10 percent of revenue on original programming.
That is important because that is the recipe used by virtually all major U.S. programming networks. Again, the implication is that Netflix sees itself as a programming network, and not as a distribution service, though that might once have been the case.
Virgin Media appears to be the first cable operator to see Netflix in precisely that way, with plans to support “carriage” of Netflix in a more integrated way. It seems likely others eventually will follow, clarifying that Netflix actually is a 21st century programming network.
Edited by Alisen Downey