Why Media Companies Should Not License More Content To Netflix?

While the rise of digital video platforms has resulted in lower advertising revenues for media networks, popular shows have found their way to streaming services, thereby boosting content licensing revenues. However, the media companies are now giving a second thought on this arrangement. Time Warner (NYSE:TWX) as well as 21st Century Fox (NASDAQ:FOX) recently stated that they would be licensing more content to their in-house video-on-demand (VoD) services rather than through third-party platforms. This would be a step in the right direction as licensing revenues are cannibalizing more important income sources — advertising and subscription — for the media companies.

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Growth of Netflix And Other Digital Platforms Has Increased Cord Cutting

It is also evident that the availability of digital content is the primary reason for cord cutting. The U.S. pay-TV industry is witnessing highest ever rate of cord cutting with more than half-a-million subscriber losses in the first half of 2015. ^[1] This can largely be attributed to the growth in digital platforms, such as Netflix (NASDAQ:NFLX), which added more than 3 million subscribers during the same period. ^[2] Netflix has some original programming but mostly it relies on the content it buys from various media houses. Media companies have been aggressively licensing its content to Netflix, among other digital platforms, and this surely has boosted licensing revenues. However, it also led to increased cord cutting and fewer eyes on traditional television. This has resulted in lower ratings and declining advertising revenues for most of the media companies.

Fox Sees More Value In Hulu Over Netflix

If this arrangement of low preferential treatment to Netflix is followed by other media companies as well, it would be a big negative for Netflix, as the real value is for content and if Netflix is short of the content in demand, there will be few takers for its streaming service. Now Time Warner has already launched its own VoD service, HBO Now, and it could include Turner and Warner Bros.’ television and movie titles on the same platform. Similarly, Fox has said that it would license more content to Hulu over Netflix. ^[3] We recall that Fox, along with Disney (NYSE:DIS) and Comcast’s (NASDAQ:CMCSA) NBCUniversal, jointly own Hulu and they see more value with Hulu rather than Netflix.

We believe that the future will hold place for both – television as well as streaming – for viewing content. While several media networks have seen lower viewership on traditional television in the recent few quarters, it doesn’t necessarily mean that overall viewership for those networks has fallen. It could be that some of the programming was accessed via other platforms which formerly were not measured. Note that it’s only recently that Nielsen has started measuring viewership trends on Netflix, among other digital platforms.

Too Much Licensing To Third Party Platforms Is Also Dangerous

Now too much licensing could also be dangerous, evident from the case of Viacom (NASDAQ:VIA), which is seeing massive ratings declines across its networks. Most of its content is aimed at millennial viewers, who are the first ones to move to the digital platform. Add to it, there is no sports programming with Viacom, thereby making a weaker case for live viewing. So, if lot of kids’ and music programming is available digitally (Nickelodeon and MTV), ratings on traditional television are bound to decline. The worst nightmare for Viacom would be if a large pay-TV operator drops its programming for the same reason. There is a stronger case for pay-TV distributors such as Dish (NASDAQ:DISH) to drop Viacom’s networks. In fact, many smaller distributors have done that over the last 12 months, and it did not have much impact on their subscriber bases (see our full story – What Happens If Dish Decides To Drop Viacom?).

Overall, we believe that Time Warner and Fox are moving in the right direction by licensing more content to their in-house VoD services. For this to be more effective, it needs to be followed by other media companies as well. Having said that, it must also be noted that it wouldn’t make sense for an individual viewer to subscribe to a number of VoD services for each network or media company. There are some standout networks such as HBO, CBS, ESPN and Showtime, where if the VoD is offered, consumers are more likely to buy it. However, that doesn’t apply to all media networks. In fact, it would be far more comfortable if all the desired programming were bundled in one subscription. For media companies Hulu could be one such platform given that it is jointly owned and can have preferential treatment for content from all of its owners.

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1. CABLE AND SATELLITE COMPANIES LOST NEARLY HALF A MILLION SUBSCRIBERS IN Q2, Digital Trends, Aug 21, 2015 [↩]
2. Netflix’s SEC Filings [↩]
3. Television executives signal a shift in relationship with Netflix, Financial Times, Sep 17, 2015 [↩]