Netflix is doomed if it has to compete with Amazon and other on-demand video providers.

The Doom of Netflix

The Doom of Netflix

A blog about business and economics.
Sept. 4 2012 4:16 PM

Why Netflix Is Doomed in a Commodity Streaming World

A huge passel of Netflix streaming movies are going to be available on Amazon Instant soon which, sensibly, has sent Netflix's share price tumbling. Felix Salmon, perhaps auditioning for a Slate job, argues that this will ultimately be a good development for Netflix. I wish him luck with his investment if he wants to pick up Netflix shares at bargain prices, but I don't think this washes:

[U]nder a non-exclusive model, all that changes. Video content becomes a commodity, with the studios happily renting it out to anybody who wants to stream it — Netflix, Amazon, whomever — probably at a standard price-per-stream with a certain guaranteed minimum. That puts the various competitors on a level playing field, and forces them to compete on customer service, user interfaces, reliability of evening-time bandwidth, and so on and so forth.

His idea is that in a commodity video world, Netflix wins because it's the best at that stuff. My counter is that in a commodity video world, the companies that win will be the companies that can embed streaming video in a larger business proposition. Apple, for example, could offer a streaming video subscription plan at cost as a loss-leader for selling iPads. That's not Amazon's current business model with the Kindle Fire or Google's with the Nexus 7 but it could be. Even under its current model, Amazon wants to sell Prime subscription to help entrench its position as the Wal-Mart of the Internet—Netflix needs to actually make a profit, but selling commodities in a competitive market isn't profitable.

Cable companies have monopoly pricing power. Content owners have exclusive rights to copyrighted content. Hardware vendors have products that need cross-subsidy. Netflix has nothing. At best, Netflix has appealing underlying technology that some other firm in a better position to make money in streaming video might want to buy. Netflix By Comcast as an add-on service to your broadband package, for example, seems like a product that people would want and that could bolster cable companies' endless weird price discrimination games by adding another layer of obfuscation.