Why Netflix Won’t Make Cable Go Away

It seems like everybody on the PF blog community is touting the wonders of Netflix these days and  I don’t really blame them. Netflix is a pretty cool service. You can pay $8 a month and watch all sorts of stuff, whenever suits you. If you use the service through your gaming console or DVD player, you can watch it on your big screen. Most American internet service providers let people use as much data as they want- meaning they can stream video to their heart’s content. I’ve read estimates that 20% of U.S. prime time internet bandwidth is used by people watching Netflix.

Netflix recently introduced their streaming service in Canada. I convinced a friend to preview it, and I have to say I’m not impressed. The selection isn’t very good, I could only find a few shows I’d want to watch. The movie selection isn’t much better, as I don’t consider 2008 movies to be new releases. So far anyway, color me unimpressed.

Will Netflix cause cable to go away forever? We had this discussion at bowling the other night, with everyone (except a certain contrarian dude) predicting the demise of cable. Should I go sell my shares of Shaw Communications in some sort of frantic? Nope, here’s why.

Somebody Has To Pay For Content

You can whine and complain as much as you want about how much actors get paid, but the fact remains that somebody has to pay them. TV shows make money by selling ads during the commercial breaks. If everybody stops watching, ads sell for less, which makes TV that much less profitable to make.

Want to know why reality TV is so popular? Networks push it down our throats because it costs a ton less to produce. Paid actors are replaced with contestants who are happy to work for free for a shot at a big cash prize. Complex sets don’t have to be built, few writers have to be hired and the only guy paid to act is the host.

Since so many people are skipping commercials entirely, networks have responded by using product placement to get those logos in front of your eyeballs. I find it ironic that certain people will complain about product placement, while replacing their cable with Netflix.

Sports! Sports! Sports!

All you Netflix lovers, do me a favor. Try to watch the Superbowl on Netflix next week. What’s that? You can’t?

Just about 50% of the population is men. And as a group, we generally enjoy our sports. Sports continue to be some of the highest rated programs shown on TV. Big events like the Superbowl or World Cup Final are watched by hundreds of millions of people. Cable or satellite are the perfect delivery systems for sports and that’s not about to change anytime soon.

Netflix May Be Getting More Expensive Soon

One of the big perks of Netflix is the cheap price they charge for streaming video. Unfortunately for Netflixers, the era of super cheap streaming may be coming to an end sooner rather than later.

As detailed in this massively good piece on Seeking Alpha, Netflix got an incredibly good deal with some of their deals for streaming rights. They paid a measly $25 million a year (to a company called Starz) for the rights to stream some 2500 movies from Sony and Disney. This works out to less than $0.15 per subscriber per month. This contract expires in late 2011, with no chance at being renewed at current levels.

Netflix just stuck a one year deal with Disney to stream previous seasons of ABC content for $150-200 million. Current seasons will continue to be shown on Hulu, which Disney owns a piece of.

The bottom line is that Netflix isn’t fooling anyone anymore when it comes to the value of streaming video. Content providers will charge the company handsomely, which means either margins will be put under pressure or prices will be going up.

Content Is King

A quick glance on Netflix gives the user access to so many series of TV shows and movies that the user thinks they’re in content heaven. They go nuts for the first few months, watching all their favorites and discovering new stuff to watch. The question is just how long the user remains enthralled with the service.

If you go back to that Seeking Alpha post I highlighted, you’ll see Netflix is very weak when it comes to popular content. In the U.S., only 20 or so of the top 100 shows on cable are available to stream on Netflix. Movies are even worse, with less than 20% of the most popular available to stream. When it comes to streaming, Netflix’s content is weak.

Bandwidth Problems

As I mentioned above, estimates put Netflix users using 20% of total internet bandwidth during prime time hours. Just how long are internet service providers going to put up with that?

Faster internet is coming in a few years. Until then, Netflix users are simply using too much. Canadian ISPs have long had bandwidth limits, look for their American counterparts to start imposing their own restrictions.

Bottom Line

There are going to be a lot of people who maintain their Netflix subscription. Most of these people are going to keep cable as well. Yes, there will be people who will drop cable for Netflix. Cable and satellite companies can always respond by increasing prices for those people left.

Many people will join Netflix, use the heck out of it for a few months, slowly lose interest, and then punt the service. In fact, over 30 million U.S. households have already cancelled their Netflix subscriptions.

Netflix’s streaming service is still a pretty cool service. At the end of the day though, cable will win out.

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