News Column

Emmys Give Netflix a Boost

July 22, 2013
Netflix expects a boost from its Emmy nominations.
Netflix expects a boost from its Emmy nominations.

A year ago, Netflix's stock was trading around $80 and the company was still recovering from the disaster that was Qwikster, a poorly advertised DVD-only business the company launched and quickly aborted. Things were not looking good.

Today, Netflix's stock is trading at around $260. And it could rise higher after the Emmy Awards in September, where the company is up for 14 awards for its original programming.

The stock's sharp rise has come on the back of a provocative dramatic series, but also on the wings of better streaming video technology and smart analysis of viewers' interests. More than anything, the Los Gatos company, which reports quarterly earnings Monday, continues to lead the charge in blurring traditional lines defining website, TV channel and production company -- as well as the concept of scheduled programming.

"We really have to view them as a new beast," says Mike McGuire, a media analyst with Gartner.

It's a beast that will have to be tough, and lucky, to survive. The traditional movie and television industries have deep, entrenched interests and contracts that will make Netflix's continued success difficult. And other digital networks are either mimicking Netflix's success or blazing trails of their own.

And while Emmy nominations bring attention, will they do much for boosting customers?

"No, not really," says Bruce Leichtman, principal analyst of Leichtman Research Group. "Those that are influenced by that are already there. If it becomes a habit, then maybe."

Fourteen nominations is a respectable lot. But that number pales in comparison to those earned last week by the likes of HBO or Fox. Forbes' Hollywood writer Dorothy Pomerantz points out that "Netflix is basically being lauded for one good show, while Showtime and HBO have deeper benches." Beltway political thriller "House of Cards" received nine of Netflix's nominations. "Arrested Development" got three and horror series "Hemlock Grove" two.

On the other hand, the TV networks may have apps that stream content or put their episodes online, but still largely rely on television audiences and advertising dollars -- a model increasingly under fire due to DVR systems that allow recording and fast forwarding.

Netflix doesn't rely on advertisers, so isn't subject to their checkbooks. As with HBO, consumers pay extra for a Netflix subscription. All of Netflix's content is streamed to phones and tablets via a free app, to computers via Web browsers and even to TV sets via partner devices like Sony's PlayStation III.

That frees them from having to negotiate packaging deals with cable providers like Comcast and Verizon.

"That's always been their advantage," McGuire says. He points out, though, that the flip side of that freedom is not being bundled in with big networks that carry eyeball-attracting programming like the NFL and NBA. "Live sports is one of the main reasons people still have their programming packages."

He adds: "We're not seeing any of those (program) licensing deals going down in price. Over time, that's going to be the cable companies' problem."

Netflix is said to be following in HBO's footsteps, going from a pure movie-viewing channel to a site where people pay for quality original content.

But there are some key differences. Netflix makes its own schedule, unburdened by the limitations of the TV schedule. And it hasn't made viewers wait week to week for the next installment of a series. Instead, to date, it's made all the episodes it has available at once and lets viewers consume them at their own pace.

Netflix also has more detailed methodology for targeting its programming. It relies on reams of data on its viewers' watching habits -- from clicks and pauses to replays and star ratings -- to determine its future content.

"House of Cards" came together because data analysis told the company that viewers liked Kevin Spacey (the show's protagonist) and had enjoyed a similar BBC show by the same name.

The TV networks aren't alone in dealing with the impact of Netflix's success.

Online entertainment site Hulu offers content from Fox, ABC, NBC and TBS, among hundreds of providers, and has premium models that offer commercial-free content. Digital mega-mall Amazon is also getting into the game. The company opened Amazon Studios and is currently in the hunt for content.

But the market for video content has a long tail. Anyone can upload a video to Google's YouTube, and recently the company introduced paid channels for its millions of users, allowing them to avoid the ads that often crowd video screens. Machinima, a site that provides entertainment for gamers and the 18- to 34-year-old male demographic, says its users viewed 2.1 billion videos in May alone this year.

Free videos might not make much money, but they do occupy a potential viewer's time, so they are competition nonetheless.

Netflix is cheap, with plans available for $7.99 per month, and offers a monthlong free trial to hook new users. But Leichtman points out that low price can means high "churn" -- loss of customers. And acquiring new customers to replace those lost almost always costs more than simply maintaining existing ones.

"That's one of Netflix's biggest challenges," he says, pointing out that the company used to report churn but doesn't anymore. His calculations also show the company's revenue per subscriber has been dropping. "Nobody wants to talk about that one."

Netflix did not respond to multiple requests for comment.

Netflix has benefited from the increasing trend of "cord cutting" -- cable subscribers dropping that service. Leichtman's group found that 13 of the largest U.S. multichannel video providers -- representing about 94 percent of the market -- experienced a net loss of about 80,000 subscribers over the year prior to the end of March, compared with a net gain of about 380,000 the year before. It was the first time the group had seen a yearly loss since it began following the industry a decade ago.

Some of that churn can be attributed to price increases that far outpace wages or inflation. Over the 16 years up to 2012, the Federal Communications Commission found that the cost of basic cable grew by an average of 6.1 percent annually.

Many consumers are agitating to be able to buy their TV choices a la carte rather than bundled. Sen. John McCain, R-Ariz., has introduced the Television Consumer Freedom Act, which he hopes will give consumers that option.

"But entrenched interests ... have made it clear they're girding for a fight," McCain wrote in a recent opinion piece for the Los Angeles Times. "This is an uphill battle, but I'm sure that the market will ultimately find a way to meet consumer demand."

While that debate simmers, viewers are increasingly turning to mobile devices, where entertainment downloads are often free or very cheap. About 14 percent of mobile device owners watched television on them in the past six months, according to a new survey by researcher Parks Associates. As might be expected, younger mobile users were more open to doing so than older consumers.

Of those who had used apps for TV in the past six months, more than 60 percent said they watched less than three times a month. Nine percent accessed them daily or almost daily.

As for Netflix, 22 percent of adults surveyed stream videos from the service weekly, compared with 4 percent just three years ago, according to another study from Leichtman.

As online viewing grows, McGuire points out that the business model for providers also will evolve. Rather than Nielsen ratings and advertising dollars, these new content providers will operate more complicated, interdependent e-commerce ecosystems.

Amazon, for instance, might evaluate any show's success by how many customers sign up for Amazon Prime, it's free-shipping program. Having Prime ostensibly gets customers locked into using Amazon for the rest of their shopping needs -- books, clothing, kitchenware, etc.

"Their measures of success will be very different from version to version. With these other guys, success is amortized across other things," McGuire says.

Not that there still won't be other, less tangible things that reinforce that success.

"Of course," he adds, "there are the subjective things, like awards."


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Source: (c)2013 San Francisco Chronicle Distributed by MCT Information Services


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