Netflix's Big Licensing Dilemma


Photo: Flickr/Michel Ngilen

Netflix is currently under fire from subscribers over its decision to hike prices up to 60 per cent. And while no company likes to upset its customers, angry tweets and Facebook posts are the least of its problems. On the surface, Netflix appears to be doing well – its stock price just hit a record high, Goldman upped its buy rating and the service has just expanded into 43 countries.

But below the surface, Netflix is in trouble and many are questioning whether or not the company has long-term viability in an increasingly competitive market. 

The first, and potentially most threatening problem, is licensing contracts.

In the next one to two years, many of Netflix’s content and licensing agreements will be up for renewal – and the cost of those licensing deals will be considerably higher than what the company is paying today.

We have already seen this issue pop up, earlier than expected. Sony recently pulled titles from Netflix’s instant watch service due to disputes over licensing terms. Disney’s titles could be next.

This is just a sneak preview of what’s to come. 

Because Netflix’s business model depends on high quality content, it’s at the mercy of the studios to supply that content. And it has been steadily cannibalising the profits of these studios, its sole source of supply, for some time now. The studios are not going to sit quietly while this happens.

There’s also new competition on the horizon. With Amazon and Google preparing to enter the arena, studios will be able to get more for the right to stream their content. 

This leads up to Netflix’s other biggest obstacle: distribution. The debate is no longer between DVDs and streaming, the question is now who will offer the best platform from which to distribute the most desirable content. 

From the consumer’s standpoint, all they care about is getting quality content at an affordable price on a reliable basis. If Netflix’s price hike has taught us anything, it’s that consumers aren’t showing loyalty to Netflix just because it was the first to enter the market. They are reaffirming what we already know: they will go to whomever does it best, for the lowest price. 

In order to remain a competitive player, Netflix must find a way to keep subscribers happy, reduce churn and keep their largest anticipated cost – licensing fees –  from spiraling out of control. All of which will become increasingly more difficult as more players enter the market. And they will. New competition in this space faces a low barrier to entry; and the market cap of Netflix is far higher than the costs of creating a viable competitor.

The company is already feeling the pressure from consumers over the price hikes, but without the price hikes, how will it pay increased licensing fees? If it loses more licensing contracts, will consumers stick around for limited available content? This could create a vicious and destructive cycle. 

Despite being first to meet consumer demand for convenient content, Netflix is quickly becoming irrelevant at its own game. 

At one time, they had the monopoly on offering the most content, on the most flexible terms, at the most compelling price. But now those licensing agreements are coming to an end. And at the worst possible time.

On the surface, Netflix might be doing well – but it’s running out of time. The company’s leadership will have to figure out how to resolve the dilemma it faces – how to survive when its original success depended upon favourable licensing deals and weak competition in a market that was presumed to have a high barrier to entry. None of those are very realistic for much longer.

Of course, Netflix just might have an ace up its sleeve with the international markets. If it can replicate its success overseas, it could improve the company’s long-term chances for survival – or at least delay its extinction.

For Netflix, the writing is on the wall. Unless it innovates or reinvents itself, and quickly, the company might become the next digital dinosaur.

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