Peruse Netflix's catalog of DVDs, and you'll find just about any
movie or TV series you want. Look for many of the same titles in
Netflix's Internet video library, and prepare to be exasperated.
It's a problem that Netflix is unlikely to
solve anytime soon. Despite an expensive expansion, Netflix's online
video selection remains inferior. Netflix offers more than 60,000
titles that can be viewed on Internet-connected devices, while its
DVD-by-mail service has more than twice that — some 140,000.
Competitive tensions and Netflix's own financial limitations account for the huge disparity.
No matter how much Netflix Inc. is willing to pay for the rights, some online video remains off-limits.
Major
movie studios are refusing to license the rights to most of their
latest movies at the same time they're released on DVDs. Premium cable
channels such as HBO and Showtime also are withholding their most
popular series, including "Game of Thrones" and "Dexter," because they
are worried about losing subscribers if the content is available on
Netflix's less expensive Internet service.
The mere $8 per month that Netflix charges
for unlimited online viewing is one of the main reasons the service has
attracted more than 23 million streaming subscribers, out of a total of
26 million. The expanding audience, in turn, is causing studios to
demand higher fees for video that they are willing to license to the
company.
Studios know Netflix is getting a bargain,
says Wedbush Securities analyst Michael Pachter. Netflix's streaming
subscribers watch an average of 30 hours of Internet video each month,
which works out to just 27 cents per hour.
The Internet video library already is far
more appealing than it was five years ago, when it opened with just
2,000 titles — mostly obscure TV series and movies that many
subscribers had seen years ago.
The streaming catalog now features recent
seasons of many acclaimed TV shows, including "Mad Men" and "The
Office," and exclusive series such as "Lilyhammer." Coming attractions
include "The Artist," winner of this year's Oscar for best picture, and
another original series called "House of Cards" starring Academy
Award-winning actor Kevin Spacey. Netflix also has struck a deal to
revive the critically acclaimed TV series, "Arrested Development,"
which last aired in 2006.
As it is, Netflix has already agreed to pay
about $4 billion in licensing fees during the next few years. CEO Reed
Hastings foresees spending billions more.
Netflix might be able to afford to buy even
more online video if it raises its prices, but that's a strategy the
company says it won't pursue following a customer backlash over last
summer's rate increase of as much as 60 percent in the U.S. For now,
Netflix is trying to showcase the material already available in its
online library by fine-tuning its recommendation system.
Pachter believes there is only so much that Netflix will be able to do to conceal the weaknesses in its Internet library.
In
particular, he believes the recent loss of the streaming rights to
movies and TV shows from Starz Entertainment will cost Netflix some
subscribers. The Starz contract expired Feb. 29, depriving Netflix's
streaming library of popular fare that included recent movies from Walt
Disney Co. Netflix had been paying an estimated $30 million annually;
Starz is believed to have demanded as much as $300 million a year to
renew.
Although Netflix downplays the loss of the
Starz content, Pachter likens it to a cable-TV system losing the Fox
network and such popular shows as "American Idol."
"I think Netflix has underestimated the
intelligence of consumers," Pachter says. "They seem to think all
content is fungible, but I don't think consumers will see it that way."