The Netflix Breakup

A thought on the Netflix split:

Netflix may be planning to go head-to-head with the content industry. They have already butted heads over the pricing and distribution timing of DVDs. Netflix, in the past, would buy retail DVDs for new releases because they were available before the DVDs that the studios were willing to sell to the rental market (both physical and through the mail). Netflix has since come to varying different agreements with the cartel companies about this practice, so they don't really do it any more.

Now, I think that Netflix may have spun off the DVD business to protect it from a similar strategy on the streaming side. With the media companies holding almost all the cards on streaming rights (recall that there's no compulsory licensing like there is for radio, internet streaming, and other public performance of music), Netflix may be planning to go at the industry more directly.

I suspect that they may buy and rip DVDs and then offer this content for streaming on a strictly one-for-one basis. This would be a format and time shifting strategy par excellence. I.e., Netflix will buy enough DVDs to own a copy for each one that is simultaneously being streamed (just as they have been doing for DVDs that are actually out via mail). When you go to stream a video, there may be some delay in availability, but, if they do their purchasing correctly using the data and predictive software that we know they must have, it will be a much shorter delay than the DVD ship-watch-return-reship cycle. In fact, they should have enough information to show reasonably accurate predictions of when your desired movie can start with minute precision.

The content industry will hate this with a white-hot passion, but it's starting to look like a viable strategy to me. If the DVD business is spun off, then there's less assets to go after if the strategy fails in court. Additionally, if the strategy does fail in court, Qwikster can just spin the old streaming strategy back up as a separate entity.

Consumers may not like this strategy very much, but they might be willing to trade instant watchability for catalog depth with a small delay. Right now, as best as I can tell, the Netflix streaming catalog is actually shrinking. The loss of the Starz content is going to kill them if they don't do something quick, and I think the above is what they're going to try.

An alternative version of this strategy would be that Netflix is looking to show off the content industry's intransigence with regard to license costs and demands in order to goad Congress into developing compulsory licensing for video content, too. I'm less sanguine about this option, but I suspect it's been considered.