Wednesday, January 19, 2011

Today, Al Franken is commenting on how Comcast wants to wack Netflix. This is a surprisingly shallow comment from somebody that I would assume is familiar with the entertainment industry.

For most of the past decade, Netflix has survived, and thrived, on the long tail of entertainment. They provide content that is already produced, and for the most part, has had its production dollars costs paid for. Thus, content owners have been willing to sell this content through Netflix for pennies on the dollar because some revenue is better than no revenue. As they try and scale, many are making the naive assumption that Netflix's costs scale. Or, rather, that Netflix's pricing model can accommodate the cost of content creation. They don't. In recent years, more and more content has shifted to cable because bundled fees and a la carte channels provide better revenue streams in the face of declining theater attendance and decreasing tolerance of advertisements.

While the cost of content distribution has plummeted, the cost of content creation has not. Digital cameras and editing have reduced content creation costs somewhat, but the labor costs of actors, stagehands and production have not dropped.

Too many Web 2.0 evangelists, to include Mr. Franken, don't fully appreciate the effect that the likes of Netflix has had on the industry. Recently, my cable TV on-demand has been bombarding me with advertisements about movies coming "two months before Netflix", and "same day as DVD". Content producers would rather have the share of a $5 on demand payment than the fraction of Netflix's $9 per month. This puts the Netflixes and Hulus in somewhat of a bind, as they will probably be forced into either increasing their prices, or else offering tiered bundles that look (are are priced) an awful lot like cable is today. Hulu is already long on this path. We forget that much of the internet last mile infrastructure, not to mention the very TV shows that we're watching, are subsidized by our relatively high cable TV subscriptions. As we move forward, much of these costs will shift, but they will not disappear, and no network neutrality legislation will get around this fact.
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