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

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.