Netflix's exclusivity play

Following what was likely an intense bidding war, Netflix have won the rights to exclusively ‘broadcast’ the new Arrested Development series in 2013. Of course, as a fan of Arrested Development, I’m thrilled that new episodes are coming. But what does it mean for Netflix and broadcasting?

Why exclusivity? The theory behind exclusivity is that the producers of Arrested Development (and the other rent claimants — the actors and writers etc) could obtain more by playing distributors off against one another than they could be simply producing a new series and allowing all distributors to host it. That said, there is always initial exclusivity in television shows and so this is just par for the course. The interesting change here is that the price a distributor was willing to pay a few years ago for the series was below opportunity cost while now that has changed.

What has changed? It is likely that the Internet has self selected for a new type of consumer. In addition, with many people turning to online streaming as a form of viewing this market is opening up. In particular, it is opening up in a way that online providers want to get customers hooked to their service. Netflix are a prime example of that.

Does this make sense as an equilibrium outcome? The short answer is no. The difference between online streaming versus broadcast is that it is on-demand. That means you watch when you want. In particular, with a TV series, you can wait until it is all available, sign up for one month of Netflix and watch it all in one hit for a low price. More critically, what that means is that multiple ‘channels’ no longer make sense. So while NBC might have got one show and CBS another, consumers had access to the bundle of channels and that is what they cared about even if their attention could be only focussed on one at a given time. For online streaming, this will mean that some shows you want will be on Netflix and others on Hulu etc. But the way that is going, you will have to subscribe to all of them to replicate the bundle of shows you want to watch. As Netflix and Hulu set prices independently, it is not clear that is going to be a cheap option. It may be because the marginal contribution of each is low and so they compete. But it is also possible that programs could sort to providers in a way that makes subscription fees go up (they become complements). My point here is that evolution in this manner takes us away from what might maximise value for consumers and so causes me to doubt its sustainability.

Will this save Netflix? I don’t see how. First, they have just announced to the world that in 2013 they are going to make a big subscriber push. That gives their competitors plenty of time to react. Second, they don’t hold the ‘master switch’ over their own business model. The ISPs do. This doesn’t change that although it may make Netflix a more attractive ISP acquisition target.

In summary, it is welcome news that popular programs whose economics did not stack up in the old broadcast world may rise again online. But it is far from clear that an exclusive approach is the best way forward.

[Update: as a postscript, we shouldn’t expect much from this new season. Historically, come backs haven’t quite worked I think because acting and writing teams lose whatever experience they gained previously. Of course, one exception was the additional Seinfeld season that was brilliantly baked into Curb Your Enthusiasm.]

3 Replies to “Netflix's exclusivity play”

  1. “My point here is that evolution in this manner takes us away from what might maximise value for consumers and so causes me to doubt its sustainability.”

    Like cbm, I don’t think this argument works. Channels (and their short-term exclusive shows) have been bundled by cable companies for a long time. The arrival of competing bundles (Hulu vs Netflix) probably hasn’t changed that part of the television business model, though as a consumer I’d like it to.

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