Illustration photoshopped by Tim Carmody

The dissolution of the Netflix-Starz relationship is a meaningful loss to both companies as well as their customers. Without Starz’s participation as an early partner and its access to popular brand-new movies from Disney and Sony, it’s doubtful that Netflix Watch Instantly would ever have become popular. Additional exposure on Netflix gave Starz and its content more visibility than it ever had competing on cable with HBO and Showtime.

Together they helped create a business and business model that grew and metastasized to the point that both companies felt they were strong enough to take their part of that business elsewhere. They bargained, fought, and bargained again. In the end, they decided their differences were irreconcilable and that it was time to move on.

So what’s next? For its part, Starz will shop its digital rights to one of Netflix’s emerging competitors or maybe try to develop its own brand with a streaming service like HBO has with Go. You’re going to find another way to watch Toy Story 3 on your computer again.

That doesn’t matter. It’s boring. We know how that movie ends. In the big picture, Netflix’s story is much more worth watching.

I want to say that this signals Netflix’s third and toughest phase in its evolution into a streaming video company. (We’ll call mailing DVDs phase zero.)

1. Foundation: Netflix introduces subscribers to streaming video on their computers, partners with Starz to offset what’s otherwise mostly B-grade basic cable content, finds a small-but-enthusiastic audience among “cord-cutters,” people without cable subscriptions or even TVs. It builds up its infrastructure, goes multi-platform with Silverlight, works out the kinks.
2. Building: Watch Instantly becomes a phenomenon, growing in subscriber numbers and viewer devotion. Streaming boxes, DVRs, game consoles, tablets and smart TVs add Netflix, making it much easier to bring it to the living room and on the move. The catalog of popular content swells, as does the bandwidth consumed by it. Netflix is triumphant, and begins to talk openly of its future being in digital streaming, not DVDs.
3. Remaking: Competitors begin to catch up, and content and cable companies strike back. We’re probably less than halfway through this phase. Starz vs Netflix is just part of the hardball that everyone in the television industry is playing with each other in negotiations — producers with networks, networks with operators, telecoms and networks with digital shops like Netflix and Hulu, all over how big a piece they each would like to extract from consumers. So the Starz-Netflix breakup is far from unique; but nevertheless, it may be the piece that will reveal the most about what will happen next.

In the short-term, Netflix loses. The company’s suffering from really bad timing, because the Starz announcement comes right on top of a big pricing shift designed to make DVD mailing a premium product and digital streaming the mainstream one. Even though they’ll have streaming Starz content until the contract expires at the end of February 2012, Netflix’s customers will likely feel like they’re stuck between either giving up access to popular new titles altogether or paying more for DVDs to get less in streaming than they had before.

The breakup also further dissolves the myth of inevitability around digital streaming in general and Netflix in particular. The path looked as if it were continually moving upward, steady and unbroken. Viewers were always going to get more shows, not less; Netflix was always going to add more subscribers, and never lose them; and the digital pie for network and content-making partners was always going to get bigger and bigger, so that everyone would gain and no one would lose.

This was always a fantasy, but for a moment it resembled reality just enough to be worth believing. Now everyone has taken two quick slaps and a glass of cold water in the face. Growth from this point forward is going to be harder for everyone, as they each fight each other both for share and to maintain what they already have.

The cable and content companies have been fighting each other for a lot longer than Netflix has, and have the battle scars to prove it. They were never going to melt away, or walk away from a new pile of money on the table. This fight, not permanent peaceful growth, was always inevitable.

Read on after the break for more on how the deal fell through and why I think Netflix still has a fighting chance.

Continue reading “How the Starz-Netflix Divorce Will Remake Video”

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