Netflix’s Real Problem

If Netflix is unwilling to pay the studios’ ever-spiraling prices, the studios can simply go to Apple, Amazon, Google or Hulu


Netflix has a big problem. Not because it angered customers by doubling its price or even because it enraged them by attempting to spin off its DVD business.

Netflix's problem is that it fundamentally has little leverage with the studios. That was manifestly clear when Starz canceled its movie contract with Netflix last month. And it was manifestly clear when Netflix signed a deal last week to pay $1 billion for the right to stream CW shows like "Gossip Girl" over the next four years.

If Netflix is unwilling to pay the studios' ever-spiraling prices, the studios can simply go to Apple, Amazon, Google or Hulu (now apparently off the auction block). Netflix's customers have no more loyalty to the brand than Myspace or Napster had back in the day; the customers will fly in a split second, as the departure of enraged Netflix customers proved over the last week.

Unlike Apple, Google and Amazon, Netflix doesn't have its own ecosystem. With their own hardware and publishing platforms, these companies have tremendous leverage with the studios — not least because the studios understand that if they don't sell to those platforms, consumers will pirate their product and play it on their Flames, iPhones and Android phones, anyway.

Even if Netflix successfully jettisons its DVD business and gets itself on every Blu-ray player, mobile phone and DVR imaginable, the studios will still have the upper hand. If they want to put it out of business, they just stop selling it product.

To ensure Netflix's survival, CEO and Co-Founder Reed Hastings ultimately has two  options: he must make Netflix a content player in its own right – something he's attempting to do by reportedly paying more than $100 million for Netflix's first original TV series, The David Finch/Kevin Spacey thriller "House of Cards".

Or he can merge with a player that guarantees him distribution such as Hulu, Google, Amazon, or Dish, which has its own content-streaming network built from satellite business and the ruins of the Blockbuster video chain.

Or he can continue as he has, hoping that Netflix's consumer growth stays one step ahead of the studios' ever-greedier demands. But, as the last few weeks indicate, that thriller may not have a happy ending.