According to Netflix CEO Reed Hastings, broadcast TV is like a horse and the horse was only good until we had the car.” In today’s video market “non-linear digital TV is the car, and it will replace the old broadcast model within a few decades.”
It’s hard to disagree with Reed Hastings vision of the future given his track record. He is after all the man who envisioned a home entertainment future dominated by streaming services while everyone else was running around trying to figure out if Blu-ray or HD-DVD was going to be the dominant distribution format for the next decade and beyond.
On the surface moving to a non-linear digital model sounds like a great idea. Really, who needs the networks? Aren’t they just standing in the way of you and I getting access to the programs we want, when we want them? From a consumer perspective this sounds like a great idea. Do we really have to wait until 2030 for it to become a reality? But from a business perspective it has a few issues that must first be reconciled.
Over the past several years the television industry has increasingly adopted the home video industries business model and used windowing to maximize revenue. Does Read Hastings really think the broadcast and cable networks are going to give up the $100s of billions in advertising revenue and carriage fees they currently get from linear TV?
TV shows first air on linear TV allowing broadcast and cable networks to generate advertising revenue and carriage fees. In 2014, television generated $77.5 billion in advertising revenue just in the United States. After airing on linear TV, shows are released to various on-demand services (e.g., Netflix, Hulu, Amazon, BBC iPlayer), creating a second window for broadcast and cable networks to generate revenue. Still later these programs are release via sell-thru (physical and digital) thereby creating a third revenue window. Assuming Reed Hastings is right and linear TV goes the way of the horse and carriage someone is going to have to make up all that lost advertising and carriage fee revenue.
Netflix needs linear TV to supplement its original programming with lower cost, lower risk syndicated TV shows. Despite all the hype surrounding House of Cards, Orange is the New Black, and Marco Polo TV, 2nd run TV shows acquired from broadcast and cable networks form a key component of Netflix’s content library. When Netflix decided to pay $2 million per episode for Blacklist there was far less risk involved than when NBC originally green lighted the series. Netflix knew how big the audience is for the show, how it is trending, who the audience is, and how that audience aligns with their subscriber base. All this allowed them to make an informed decision on Blacklists ROI. Take away linear TV and all of a sudden Netflix’s content acquisition decisions become a lot more risky. Just take a look at the success rate for new TV series each fall to get an idea how risky program development can be.
If Reed Hastings thinks Netflix could succeed charging $20, $30, maybe even $40 a month as programmers look to OTT video providers to compensate them for lost linear TV revenue then there is a strong likelihood his vision will likely come to pass, however, if he wants to continue to be a low cost provider of syndicated programming then he needs linear TV to be happy and healthy in 2030 and beyond.