Netflix Doesn’t Have Deep Enough Pockets

by Lawrence Meyers | April 18, 2012 10:00 am

Look, I love Netflix (NASDAQ:NFLX[1]) and all the content I’m able to stream or order on DVD. And Netflix had its period of market disruption. However, the fact is the world is moving rapidly toward an all-streaming environment, and physical DVDs will be the next VHS tapes within three years.

The cost to license streaming content is high, and it will remain high. Other competitors can afford to pay those high fees, including Apple (NASDAQ:AAPL[2]), Google (NASDAQ:GOOG[3]) and Amazon (NASDAQ:AMZN[4]), and eventually it will include DirecTV (NASDAQ:DTV[5]) and other cable providers.

In fact, it kinda sorta already does.

Deals to license streaming content usually are not exclusive. Somebody would have to shell out an awful lot of money to corner the market for streaming content. MGM just licensed its enormous library to Google/YouTube for streaming; the amount paid was not disclosed. These kinds of deals are going on all the time.

Out of all the companies mentioned, Netflix has the least amount of cash on hand, and least amount of cash flow. To keep up with the other players, Netflix will have to be competitive in terms of what it can pay — and it won’t be able to. Sure, MGM can tell Netflix that it still will license streaming content to it, but MGM can’t sell the content too cheaply to Netflix, or Google will come back steaming mad — and you don’t want to make Google mad.

Meanwhile, the pay TV network Starz, which is owned by Liberty Media (NASDAQ:LMCA[6]), didn’t surprise anyone when it announced the company would provide its content to DirecTV. John Malone owns a big chunk of DirecTV. Starz bailed on its deal with Netflix to get more money for its content, and you can bet that’s because DirecTV also sits on billions of cash and billions in free cash flow. So now DirecTV is in the streaming game. Comcast (NASDAQ:CMCSA[7]) is launching its own, and guess what — it has tons of cash, too.

Some people think Netflix can win additional subscribers through its move into original TV series, like House of Cards with Kevin Spacey. It’s a great idea. I love it. But it’s going to cost tens of millions of dollars to license that content exclusively. The company has all these off-balance sheet obligations to pay for the streaming deals it already struck, and I’m doubtful that cash flow will be there to pay for them.

It’s not that Netflix won’t be around for a while longer, but I’m sorry to say it might be gone completely at some point.

And the consumer downside is that a lot of little independent movies will have tough times finding audiences again.

As of this writing, Lawrence Meyers[8] did not hold a position in any of the aforementioned securities[9]. He is president of PDL Capital, Inc.[10], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at[11]. He also has written two books[12] and blogs about public policy[13], journalistic integrity[14], popular culture[15] and world affairs[16].

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