Reports suggest studios should be afraid, very afraid (of Netflix)
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By Tim Mullaney, Special for USA TODAY
A couple of new reports this week suggest that Netflix's effect on Hollywood will be an even scarier movie than the moguls thought.
Citigroup analyst Mark Mahaney says Netflix's U.S. customer base will double to 50 million by 2013, and the company is beginning to grow even faster elsewhere. That's what's happening in Canada, Netflix's first market outside the U.S. In less than a year, it has signed up 8% of Canadian households - a task it took five years to complete in the U.S. Netflix will likely be in two to three more nations by year-end 2012, Mahaney wrote. By Citi's calculations, expanding to 20 countries in Europe and Latin America will add 43 million households if Netflix matches the percentage of households it serves in the U.S. now.
That changes the balance of power in the running tug-of-war between studios and Netflix over what movies Netflix is allowed to stream, and what it should pay for them. Time Warner, especially, has resisted letting Netflix stream movies from Warner Bros. and original shows produced by its HBO unit. It is trying to protect both the studio and the $15 a month or so people pay for HBO with tactics such as the launch of its own HBO Go streaming service and today's acquisition of Flixster, which offers free streaming for about 1,200 movies and an array of TV shows.
Mahaney had been a skeptic on Netflix's $231 a share stock but gave in and recommended buying it on Monday, saying swapping DVDs that are expensive for Netflix to buy and ship for cheaper, easier movie streaming should take Netflix shares to $300.
A second report this week comes from Digital Entertainment Group, saying that sales of DVDs fell 20% in the first quarter to $2.1 billion, further crippling a revenue stream studios have counted on.
For consumers, the result of the studio-Netflix tussle is likely to be even more movies available for streaming. The question is whether a Netflix with 50 million or even 90 million users will be able to get content sooner, without waiting for movies to cycle through exclusive windows for DVD sales and pay-per-view, damaging the studios' other markets even more.
Netflix wants to make nice, Chief Executive Reed Hastings said on a conference call last week. "As we get a larger subscriber base it becomes easier to write big checks,'' he said. "It's very respectful, I would say, across the board.''
That's a little too nice. One detail deep in Netflix's first-quarter financial report tells the real story. The company spent $142 million more this year than last to license content for streaming. The drop in DVD sales DEG reported was about $500 million - before any Netflix-inspired cancellations of movie channels or people who decide to wait and Netflix last month's release rather than spring for pay-per-view. Do the math.
