Why Blockbuster's Streaming Collapse Won't Hurt Netflix

After backing out of plans to compete with Netflix, Blockbuster is all but done. That's not great news for the streaming-video space, and Netflix is in a rough spot. But Blockbuster's latest stumble toward oblivion isn't necessarily the final nail in NetFlix' coffin.

On October 4, Dish Network scrapped its plans to revamp the Blockbuster brand and launch a subscription-based streaming-only product to compete directly with Netflix. Dish ran the numbers, evaluated its options, and (correctly) assumed it didn't have the assets to make a Netflix competitor work.

That leaves Blockbuster on the ropes again, with just 900 of its former 3,300 retail stores and no clear digital strategy. But don't assume that the math will work the same way for Netflix.

The Bad News For Netflix

Dish's decision confirms what I've been saying for some time: the flat-rate streaming market isn't a very profitable place. As I noted in Netflix Deathwatch over the summer: expensive bandwidth, second-rate content and strained relationships with content providers are par for the course for the entire industry.

Paul Sweeting, Principal at Concurrent Media Strategies, told E-Commerce Times that "…studios have long been leery of subscription-based streaming of movies because it produces the lowest per-view/per-capita return for the rights holder of any business model, and it cannibalizes higher margin businesses like pay-per-view rentals and even purchases." In the same article, another analyst predicted that flat-rate streaming may have only another five or six years of life.

The market is obviously sick, and it needs to change.

The Good News For Netflix

Troubled or not, Netflix still owns the streaming video market, and that brings advantages Dish and Blockbuster couldn't match. Most importantly, Netflix has existing content relationships that, while strained, put it in a better position than a startup.

In an October 8 analyst note, Morgan Stanley's Scott Devitt estimated that Amazon, which already has relationships with most studios, would need to spend an additional $1 billion to $1.2 billion in licensing rights to launch a similar service.

If that price is too steep for Amazon, it's probably beyond most competitors. Barriers to entry don't validate the streaming-video business model, but they do buy time for Netflix to try to sort out its problems.

In the long term, Netflix has an infrastructure advantage, since it owns its own Content Distribution Network (CDN), and its massive user base should help it secure content from overseas and underexposed independent sources.

It's also developing original content with headliners like Kevin Spacey to hedge against expiring contracts and differentiate from competitors. Netflix's margins per customer may not be fantastic, but with all those users, it has cash to invest in programming.

Eventually, though, Netflix needs to balance cheap back-catalog offerings with enough premium and custom content to create a profitable offering "good enough" to justify its prices. It also needs to keep an eye on Hulu, HBO and other content providers looking to ramp up their streaming businesses.

Put it all together, and I wouldn't want to be in Netflix' shoes. Blockbuster's implosion is a reminder of how tough things have gotten in Netflix' core business, but at least Netflix still controls its own destiny.

 

Blockbuster and Kevin Spacey images courtesy of Shutterstock.