Our Analysts

How big is that digital pot of gold?

By Matt Stump, Nov 10, 2011

The pot of gold programmers have discovered with Netflix, a pot that may grow larger with Amazon, Google and others waiting in the wings, is no doubt seductive.

The last four years have brought a recession, an associated advertising slump, a drop in the DVD business and cord cutting/shaving fears that all cloud any programmer’s financial picture.

Most media companies have now steadied themselves, and the new torrent of high-margin, digital revenue is making bottom lines look even better.

The question is how long will it last before new ceilings are reached?

Netflix has run into its first hiccup — subscriber losses that were only a bad dream six months ago. It faces $3.5 billion in programming outlays that will require a return to subscriber growth. And its international expansion has been put on hold until it rights its financial ship. There is a limit to the blank checks Netflix can write. Amazon has probably twice the money to spend (a $6 billion cash war chest), but a much smaller Amazon Prime base (perhaps 3 to 5 million homes) over which to amortize programming costs. Remember, Google ($46 billion) and Apple ($80 billion) have had all the money in the world to outspend Netflix 10 times over, and neither has dipped its toes into those waters, yet. And how high can Amazon and Netflix’s respective subscriber counts go? At what point does a $200 million deal get renewed for only $150 million or $100 million?

Today, it’s all found money for programmers, so a slight drop may not matter, save for the Wall Street analysts that don’t like one-time revenue streams.

What if some of the new programming coming to Netflix or Amazon Prime subscribers isn’t valued by them? Content being sold from the backend of the library may just return to backend of the library, unwanted as it was before.

Another series of questions concerns the consumers’ various tipping points. How many subscription services will a consumer purchase? How much time can they apportion to watching Netflix and Amazon? How will that impact their TV and cable viewing and their pay TV subscriptions, or their viewing to traditional cable and broadcast TV?

Programmers are finding new revenue streams for library product that in many cases was producing no TV syndication revenue. The inclusion of past series on Netflix and Amazon can help ratings for those programs in original production. And with well-heeled competitors in the digital space, it appears multi-hundred million checks will still becoming for the foreseeable future. But at some point, somewhere in the eco-system, the model will start cracking. And that’s no place where anyone wants to be.