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Netflix and Canadian TV: Menace or Messiah?

We hear a lot about Netflix, and we hear it often, by both those who love and loathe it. It has become a fixture on the Canadian media scene in a very short time.

Indeed, there has been much gnashing of teeth since Netflix’s inception in this country in 2010, including the tightening up of bandwidth caps, inquiries by the CRTC, as well as the constant invocation of the streaming video on demand service (SVOD) in regulatory proceedings, from the CRTC’s 91h hearings just last week and no doubt in the one that it is set to start next week for Bell and Astral’s proposed amalgamation.

With roughly 1.6 million subscribers at the end of last year (IHS Screen Digest), it’s revenues can be estimated to have been about $134.3 million in 2012. This is a sizeable amount for sure, but where does it fit within the existing $7.5 billion industry (not counting the carriage and distribution side of the biz)?

So, the question for our post today: Netflix, menace or Messiah?

Netflix’s estimated 1.6 million subcribers, no doubt lean toward the latter view, even if they have to endure deliberately downgraded quality (i.e. no HD) to ensure they don’t blow their monthly bandwith caps and a slimmer catalogue to choose from. Even those in the TV biz regularly tell investors that they don’t expect any short- to mid-term harm, while the long-run is still anybody’s guess. 

However, look further and read the pages of leading newspapers in this country (take this piece by Andrew Coyne from the National Post just two days ago for starters), and Netflix is often cast as ushering in the death of “old TV” and as the spearhead of a much bigger ‘video revolution’ that is poised to bring Canada’s big four vertically integrated media goliaths to their knees: Quebecor, Rogers, Bell and Shaw.

The long list of new content acquisition deals, and charts showing internet traffic attributable to Netflix going through the roof (here and here), all seem to have a point, and who knows, maybe all of the kerfuffle is on the mark. I don’t want to offer anything definitive on the point other than to say that, me, I’m skeptical.

However, what I do want to know is something a bit more systematic about where things stand. And so as I’m won’t to do, I’ve encouraged my students to have a look at things and recently, one of them, Patrick Foley, did a real bang up job putting together the following chart showing Netflix’s content acquisition and development.

I’ve added to the table here and there and then developed some commentary of my own afterwards, but I think it’s good to, first, take a deep breadth and take stock of what kinds of content deals that Netflix has and hasn’t done. Otherwise, I’m afraid that a compendium of disparate press releases will add up to the impression that there are barbarians at the gate and unless we do something fast, they’re gonna tear the place apart – that “place” being the “Canadian television system” as we know it.

So here we go, a selection of Netflix’s content acquisition and development deals over the past few years.

Netflix’s Content Acquisition and Development Deals

Year Library Content
Starz 2008 2008  5 yr. deal. $30 million per year. Access to 2,500 titles, including “classic films” such as “Scarface” and “Beetlejuice”
NBC Universal 2010 Renewed contract for 5 additional years, worth $1 billion. Rights to titles from Paramount, MGM, and Lionsgate studios. Also acquires rights to old and new episodes of ”SNL,” “30 Rock”, “The Office,” and other popular shows. Can offer SVOD (streaming video on demand) 90 days after airing on Pay TV.
CBS Corp. 2011 4 yr. “Pay- as-you-go” deal with The CW Network (jointly owned by CBS and Time Warner) 700 hours of old CW programming and rights to new episodes. Older shows like “Cheers” can now be streamed. So too for newer ones, e.g. “Gossip Girl” and “Vampire Diaries”
Time Warner 2013 “Pay-as-you-go” deal between Netflix Turner Broadcasting & Warner Bros (TW subsidiaries) ($100s millions). New and old Warner Bros content produced for TV (i.e. shows already aired on ABC, NBC, FOX, HBO, Cartoon Network, TNT, etc.), including “666 Park Avenue” “Revolution”
Disney 2012 $200-$300 Annually Classic Disney titles and access to newly released Disney movies for 3 years (7 months after theatre release). Latter came its way after Disney’s contract with Starz ended. Classics like ”Pocahontas”, ”Alice in Wonderland” and LucasFilms productions available for internet streaming.Beginning in 2016 Netflix can exclusively stream films from Pixar, Marvel, DisneyNature, and Disney Animation Studios.
Starz 2013 Netflix did not renew contract Netflix loses rights to 2,500 “classic films” such as “Scarface” and “Beetlejuice”
2012 Arrested Development Former Fox TV series revived. May be prequel to movie.
Media Rights Capital 2011/12 – 2013 House of Cards Adaptation of previous BBC miniseries of same name. First TV series to premier on Netflix, beginning Feb. 1, 2013.
Viacom / Dreamworks 2013 Turbo F.A.S.T. (Kids animation series)  Original animated series based on forthcoming Dreamworks’ movie, Turbo.

Sources: Edwards (2012). Bloomberg; PR Newswire 2012; Kang (201). Washington Post. Villarrea. (2013). LATimes. Gruenwedel (2013). Home Media Magazine.

There’s much to be said about the above list of activities. Instead of writing another of my trademark long, long posts, however, let me distill a few points that I think are the most important.

Characteristics of Netflix deals:

  1. Acquire old, classic, established libraries of content.
  2. Acquire rights to air new episodes from ongoing TV series, and newly produced movies, after time delay.
  3. Youth/kid/teen oriented content is really important.
  4. ‘Old TV’ is the main ingredient of ‘new TV’, with established TV series revived and remade into new ones (Arrested Development; House of Cards) and forthcoming movies become TV series before they even hit the box office (Turbo F.A.S.T).  In other words, original content is derivative of existing content.

Make Peace Not War: or how the Traditional US (but not Canadian) TV and Film companies learned to live with Netflix

  1. Netflix breathes new life into classic/old content.
  2. It opens a new distribution window: ‘streaming video on demand’: SVOD, slotted into the pre-existing, window-based Hollywood model that staggers the release of movies between regions and across time.  Hollywood always learns to, at least eventually, embrace these new windows, even if late in the game, as my professor Janet Wasko taught us many years ago. Why? Because they are new markets, sources of revenue, that’s why (see here for latest evidence of growth of new windows relative to box office.).
  3. Netflix is complementary because Netflix subscribers tend to watch more TV rather than less, as the MediaTechnologyMonitor studies have repeatedly shown. As the most recent MTM study says, for instance, “Netflix customers are not so-called cord cutters. . . . In fact, Netflix users were found to be more likely than other consumers to shell out for a premium TV package, even while paying $8 a month for the streaming service”. UK communication and media regulator, Ofcom (see p. 3), has come to similar conclusions (also see here with respect to UK).
  4. Netflix may increase “packaged-media sales” (DVDs, DVD box sets, etc.) and cable VOD by sizeable amounts (15-30%), some Time Warner execs have claimed, although some of the scholarly literature I have read seems less convinced.
  5. Adds foreign films that lack North American theatrical release (thanks Patrick).
  6. Enables time-shifting and space-shifting via Microsoft’s Xbox 360, the Nintendo Wii, Sony’s PS3, Blu-ray disc players, and internet-based video players like Apple devices (again, thanks Patrick).
  7. And some stalwarts of the ‘traditional mediacos’ have a position on Netflix’s Board of Directors alongside internet and tech companies and that affords them at least a small lever of influence and control: e.g. Ann Mather (Walt Disney, Pixar, Google, MGM, Village Roadshow Pictures), Leslie Kilgore (Amazon, LinkedIn), Jay Hoak (Technology Crossover Ventures) A. G. Battle (Ask Jeeves, Expedia), Reed Hastings (Netflix, Facebook, Microsoft) (Netflix, 2012).

Why Canada’s Vertically-Integrated Players Continue to Hate Netflix:

  1. Must compete with Netflix over rights to new distribution window vs. treating them as an inexpensive bolt on to the existing suite of rights they acquire.
  2. They don’t have much original content of their own so must compete even more with Netflix.
  3. Netflix seems to give media workers more creative autonomy in their work and a bigger slice of the pie and more say afterwards.
  4. The creation of a new window – SVOD – increases pressure to compress ‘old windows’, especially VOD – a lucrative cash cow for existing BDUs’ specialty and pay TV services that continue to rake in operating profits in the mid- to high-20% range (see p. 1).
  5. Netflix enables time-shifting and space-shifting on other company’s devices —  Microsoft’s Xbox 360, the Nintendo Wii, Sony’s PS3, Blu-ray disc players, Apple, etc. – rather than their own.
  6. Finally, Canadian media execs seem to loathe Netflix because they have no position of influence or control at Netflix, or anything like it.

Does this mean that nothing’s changing? Absolutely not! Television and how it is made, circulated, controlled and consumed is changing dramatically.

Fast disappearing is the old scheduled model of tv programming punched out by vertically-integrated tv cos modelled on the Fordist approach to car production (ownership of everything from inputs to manufacturing and dealerships), with highly unionized workforces and subsidized consumption brought to you courtesy of advertisers and government funding.

And what’s coming online? Hold your breath, folks, but it just may be the the centuries’ old  ‘publishing model’. In this model, TV execs function as commissioning editors signing contracts and royalty cheques with creative talent. Most media work becomes more and more precarious, less unionized and less well paid. Disappearing are the “old days” when union bosses negotiated long-term contracts for media workers with durable media jobs and clear roles and back are the really old old days when everybody had to fend for themselves.

In addition, in the publishing model, as with books, people pay for what they get while the ratio of advertising and government subsidies to public service media steadily declines. Audiences’ preferences become more closely aligned with what they pay for as a result, but the gap between the media rich and media poor expands.

Think catalogues of movie and TV program titles, not a linear scheduled flow of appointment viewing. Long live TV, while everything changes.

So, Netflix, Menace or Messiah? You be the judge.

  1. June 16, 2015 at 7:55 pm

    Production is the location where new and also ingenious products will certainly originate.

  2. May 5, 2013 at 4:42 pm

    I’d like to interject several quick points:

    1. “Lillyhammer” preceded “House of Cards” as NFLX’s first original program;

    2. Netflix was most definitely a menace to the video rental industry (Blockbuster, Rogers Video), which I find tends to be forgotten when examining the threat to vertically integrated BDUs (I suppose this belongs in the “distribution window” category);

    3. I’m uncertain of the sustainability of Netflix’s business model. It’s easy to pad content holdings (the only thing that guarantees continued subscriber revenue) using market cap, but NFLX’s price to earnings ratio is astronomical. What Happens if Carl Icahn decides he wants to dump Netflix?

    If I had to hazard a guess, it would be that the upshot of the “Netflix disruption” will be a subsumption of the SVOD model by existing BDUs, advertising increasingly being used to bolster the cost of content on streaming services, and a potential increase in broadcasting efficiency. Perhaps a back door to à la carte programming in Canada?

    • May 5, 2013 at 11:14 pm

      Smart observations and comments, as usual Ben. Thanks for making them.

      I’ll check into the Lillyhammer situation and revise as required. The other points you make also all spot on serious considerations. The third is one that’s been around for a couple of years now and still Netflix keeps on defying those who make it, but when we take the long view, I think the correct response is probably still too early to tell.

      As for your last point, I’m not so sure on this one. The forces of ‘unbundling’ and the idea of the publisher model that I was hinting at towards the end of the post are quite strong and with the decrease in vertical integration in the US in particular — home of Hollywood and massive tv production capabilities — means that those who make and own tv programs and movies are less wedded to those who own the pipes than we find in Canada. I think that pattern is also becoming more prominent in the biggest media economies around the world, so am less inclined to line up with you on your last point. Again, though, I have no crystal ball and won’t be betting any farms on this one.

      cheers and trust that you’re well!

  3. May 3, 2013 at 12:59 pm

    @brett mcateer: The ad market will evolve around Netflix. Media’s core income is from ad revenue. Eventually advertising on services such as Netflix is going to be something we may all have to get ready for. It’ll be less intrusive than regular online media. One very likely evolution would be to embed ads in the view. We’re already used to that from the mainstream, and can be used in variation of distribution settings:


    I think it’s just a matter of time now before this method is widely accepted online.

    • May 3, 2013 at 2:38 pm

      Great to see that back and forth here, Jason and Brett.

      An important point with respect to advertising, however, it is no longer the core source of funding for media and is steadily declining relative to the ‘pay-per’ model. That is true with respect to specialty and pay TV services, and more so once we start to add up connectivity charges across the board: internet access, cable subscriptions, wireless and basic old telephone service, etc. No doubt advertising is central, but the key to the publishing model, as I describe towards the end of this post, is that it’s on the wane relative to paying for cultural goods, for better or worse.

      • May 3, 2013 at 10:49 pm

        @Dwayne: I agree that adverting is no longer the core source of funding, however I think it’s because the ad market is still in a state of flux and transition to digital.

        No doubt that there are other sources of income available for content producers. Kickstarter, pay-per model etc. That income will work along side advertising revenues. I still believe advertising will have a significant part in production revue when the dust settles. There’s too much money involved for that sector of the industry not to evolve, especially in the age of big data and targeted adverting. I think they just need their livelyhood threatened enough before they kick into high gear on digital. I believe that will start as people start cancelling their cable tv services and switch on online video services. That’s already happening, and will probably be more so next year.

        So as a producer once the dust settles, you should have a wide range of independent sources of income, which I think ad revenue eventually will become a big part. You also have the benefit of lowering production costs due to new tech, several distribution options…great time to be in media production once the dust settles.

        On the consumer side, ” internet access, cable subscriptions, wireless and basic old telephone service, etc. ” plus having to purchase media on top of this using the pay-per model, These two sides look a bit of a distance apart to me. And as the big media companies fight it out, I do agree the gap between the media rich and media poor will expand. I think that’s only temporary however. The digital age is a good equalizer. How temporary will be determined by how long the media rich can drag this out, and how the market reacts to increasing costs in basic services. Pay-per model may look good to some today, but we are far from completing this transition to digital especially in media.

        Lots of unknowns factors. The way I’m seeing things could also be completely wrong as well, but I do believe that it’s worth on checking in once in a while to see what the media ad market is up too. Keep an eye on it 🙂

  4. May 2, 2013 at 10:06 am

    Hi Dave,
    LOTS to talk about with this issue. The whole topic seems to boiling over right now, most likely because the big media companies are at the trough again looking for public subsidies for ‘Canadian content’ and mandatory carriage.

    ‘Netflix’ is simply a lightning-rod issue and we could use any number of different services or opportunities (or missed opportunities) to describe the Canadian media environment.

    Ultimately, Canadians have a choice to make: do we want a closed system or one that’s open?

    If we want a closed system, which I see at the status quo, we should acknowledge that the status quo will simply depreciate to a point of economic ruin. Yes, it’s that alarmist. We will fail to inspire Canadian entrepreneurs to develop projects here because there will be too many limitations on them to produce unique tools and services for the digital consumer. Evidence? The last 10-15 years of efforts by our large media companies to control the market and consistently over-charge Canadians for basic services choking out innovation in Canada, all the while making us ‘vulnerable’ to ‘non-Canadian’ services like Facebook, Twitter, Google and so on.

    Under an open system, we’d have more competition and less regulation. And substantially less protection of the large media companies that have consolidated the access to Internet services to a choking point that is unacceptable. And considerable fewer dollars spent (to the tune of several billion per year) on subsidies to large media companies in Canada for ‘Can-con’. This money would be better spent on developing international markets for existing (and potential) Canadian content through effective distribution platforms … like Netflix. Alternatively, the money would be better spent by creating a digital infrastructure that is the envy of the rest of the world.

    • May 2, 2013 at 11:31 pm

      I see this a bit differently, I don’t think it’s a “choice” Canadians have to make. The choice I think to a more open media market has already been made by consumers. The choice I think relies on big media to engage an open market, or try and fight off the inevitable. History shows big media fighting technological evolution, now and in past decades however they are eventually forced to adapt by the market.

      We need more innovative idea’s and competition in the digital market in order to foster growth and change in the emerging new media world. Too often then not media is held back from evolving due to hugely expensive licensing fee’s, and current copyright regime. That in itself presents a moral hazard for big media. Essentially even if the markets move in a direction, they don’t have to innovate, as content distributors they can just say no or hold a tight leash on those innovating until they become in direct competition. I suspect, that while this is currently boiling over, there’s much more of a fight on the way.

      At the same time innovates need to be challenging the current media landscape, and our current copyright licensing regime to help pave the way for future innovators. Copyright in a sense, is not innovation friendly, especially in the media industries, and it’s not because of piracy.

      All one has to do is take a look at what did Rogers Communications did hours after Netflix launched in Canada. They lowered bandwidth. Netflix CEO’s had a great and missed opportunity to pave the way for new media and should have complained to the Competition Bureau about the move by Rogers and also the UBB issue all together. There’s only so much Canadians can do in this environment, the challenge is on industry and innovators.

      I have family and friends working in big media. They all use Netflix, in fact a vast majority use US proxy servers to gain entry to the US version of Netflix. Some of these people are actors as well, so it’s going to be a hard sell, both within industry and towards the general public to keep nailing Netflix and consumers all the time for Big Media their problems. One would hope that the video content industry doesn’t choose the same path as the music industry did, and try and sue it’s way into the ground.

  5. May 1, 2013 at 7:11 pm

    Being a simple man, I tend to see the industry as three revenue-generating enterprises: Creation (e.g., Astral), Distribution (e.g., Netflix) and Infrastructure (e.g., the network operations side of things). Presently, some of the big four can only pretend to be vertically-integrated in respect of the content creation.

    If Netflix is doing a better job of Distribution to meet consumer demand, and if the big four cannot get behind content Creation (which has been tried and abandoned because those who understand dollars-per-meter of cable pulled don’t usually get the whole creativity thing) then clearly the big four will have to satisfy themselves with Infrastructure revenue.

    It seems that Netflix is neither menace nor messiah because nothing stays the same including self-serving behemoths clinging to the way it was.

    • May 2, 2013 at 11:40 pm

      Just to add one more point. The ad market is now there for new media, especially in video content. I think a lot of investor uncertainty is causing a bit of a hold back in reaching it’s full potential, partly because it’s industry that decides which innovative idea that survives, not the market right now. If the industry were to embrace open media, then investors will follow. This will happen eventually, the money is there!

      • May 3, 2013 at 7:33 am

        In re ad revenue, agreed, though the Netflix paid-stream model doesn’t really need it. Witness Yahoo’s recent acquisition of streaming rights to the SNL back-catalogue for the stated purpose of selling ads around streamed content.

        (As an aside, I do wish there were a more dignified word for content. Will the day come when the putative critics confer stati like “Best Content of the Year” and “The Can’t Miss Content of the Season”? I doubt that the creative souls are happy with their creative works falling into the unglamorous category of content; with the commodifaction of their creativity.)

    • May 3, 2013 at 3:34 pm

      Ad revenue is certainly an important part of this discussion. For the last decade, despite the obvious opportunity available with digital, agencies have continued to pour billions into ads for TV. This is part because it’s always offered the path of least resistance – ie. you can spend the most money with the least amount of work – but also because it represents an important part of the cycle of directing cash from mass advertising to mass media to mass influence.

      Generally, the advent of digital advertising and services should have created a substantial shock in the system like they have in the US, but Canada lags in terms of adaptation because the biggest distribution system – TV – continues to be protected by our government.

      Given the tone of the discussion, my concern is that our government and media companies will do everything in their power to screw up a good thing by either forcing Netflix to carry ads or slow the service down to a crawl using tactics like UBB or throttling (both of which should be deemed illegal by the Competition Bureau).

      So … to Dave’s earlier question: Netflix is both a menace and messiah. They represent a menace to the status quo media establishment and messiah for those that want flexibility and options when it comes to entertainment.

      • May 3, 2013 at 5:18 pm

        Yes, bittur, big numbers still, but the mass model is losing ground and has been since Anderson’s “long tail” was spawned by Amazon. We see it with hundreds of cable/specialty programmers. What is the distribution of ad spend at cable/specialty vice “broadcast”? The broadcast slice of the ad pie is shrinking and what does Netflix do if not make a specialty programmer of each and every subscriber? Broadcasters (by any one of a number of definitions) are miffed because Netflix subscribers are choosing to pay for their content, bypassing a big chunk of the broadcasters’ advertising revenue.

        The mass model is wasteful as advertising efficacy goes, missing too much of the target demo while bludgeoning everybody else.

        By comparison, Web technologies, Netflix included, make targeting insanely easy. But then how would Netflix target advertising without attaching directly to the content? None of us would otherwise allow advertising in our private programming domains, would we? Advertising avoidance is the reason we pay for the service.

        Or is time/convenience more important to Netflix subscribers?

        Or maybe they are equal, and if so, is there any reason Netflix couldn’t offer me a choice to endure advertising or pay to avoid it, or even select some mix of the two? (And wouldn’t this be another example of the long tail of personalization?)

        On the other hand, maybe Netflix is ushering in the day when P&G (among others) returns to the golden age and its former glory, the progenitor and inheritor of the mass model. The once and future king of soaps and sitcoms.

        And as to government’s role, I think that any government’s first, perhaps ill-conceived objective is to impede the progress of anything that is headed away from any legitimate industry’s status quo, (but how would I ever prove it?)

  1. May 2, 2013 at 1:27 pm

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