Have you guys seen Shrek Forever After? (Don’t worry; I’m going somewhere with this.)
So after the first three Shrek movies, the once-disruptive ogre has settled down into quiet, prosperous family life. But the problem with his quiet, prosperous family life is that it’s boring. Shrek misses his old, wild days of being untamed and terrifying. So he strikes a deal with Rumpelstiltskin to erase everything he’s gained and become a free ogre again…. Only, of course, the deal backfires; he soon realizes what he misses his family, and fights to get them back.
I’d never seen this Shrek before this summer, but my niece and nephew love it. They watch it on HBO On Demand over and over again. And after the fifth Shrek movie is released in 2013, they’ll probably watch that over and over again, too. Except instead of HBO, they’ll be watching it on Netflix.
All of Dreamworks Animation’s 2013 releases will be on Netflix. They won’t be on HBO. That’s the new deal Netflix has struck with Dreamworks, and the best news Netflix has had in weeks. Netflix will have the exclusive rights to Dreamworks films in the “pay TV window” — i.e., after the film is released, when the movies would normally appear on pay-per-view and premium cable channels like HBO or Starz.
The studio’s back catalog — Kung Fu Panda et al. — will also be rolling out to Netflix over time, although exactly what and when remains a mystery. That catalog isn’t gigantic — Dreamworks Animation hasn’t been making films forever — and it’s not as critically acclaimed from top-to-bottom as rival Pixar. But it’s solid, it plugs the family movie hole Starz left behind, it’s all Netflix’s, and it’s not the only studio deal Netflix can make.
This is why I keep circling back to this idea: Netflix is a video channel. It’s a mistake to treat Netflix as if it were a substitute for cable, rather than what it’s become: a premium pay network every bit the rival of Starz, Showtime or HBO. Netflix just has a distribution model that bypasses the cable operators altogether.
This is why I had to chuckle a little bit when DISH Network announced its new Blockbuster Movie Pass. It promised a worthy competitor to Netflix but wound up presenting a Blockbuster-branded on-demand network. You need to be a DISH subscriber first to even get Movie Pass, and DISH owns Blockbuster (or what’s left of it) outright.
Recognizing that Netflix isn’t a cable company shows that Netflix does not have to worry about DISH and Blockbuster, or failed negotiations with channels like Starz. Netflix has to worry about other content channels, like HBO Go, gobbling up customers’ last $10, and other digital-only video services like Amazon Prime — which has a brand-new content deal of their own, with Twentieth Century Fox, worth 11,000 movies and TV shows and who knows how many dollars.
Netflix, in other words, isn’t just any ogre. Netflix is Shrek. Even at a disadvantage, he’s dangerous.
There’s another way that Shrek’s story tracks Netflix’s. In Forever After, Shrek loves being a disruptive solo act for a little while. Quickly, though, he realizes that he and the friends and family he cares about are better off knowing each other and working closely together.
Netflix’s team is realizing — at least, I hope they’re realizing — that Netflix needs friends and partners, too. Like any relationship, with both media partners and especially customers, there’s a give and take, with due consideration for tone and timing. This is particularly true when, like Netflix, your business equally depends on media content, broadband networks and video devices, and you don’t own or make any of them.
The only thing Netflix has going for it is solid infrastructure, reliable software, a reputation for quality and (most volatile of all) customer loyalty. (Note that I say “the only thing” as if any one of those things are easy. They’re not.)
This is part of what makes Wedbush Securities analyst Michael Pachter’s argument that the new streaming-only Netflix is ripe to be sold so enticing. In a note to clients, Pachter argues that the Netflix/Qwikster split was necessary for the streaming part of the business to be purchased by an even bigger company, such as… wait for it… Amazon.
“There’s a method to their madness,” Pachter says of Netflix, upgrading its stock from underperform to outperform/buy on the speculation that Amazon may buy the company. No physical discs or distribution centers means no sales taxes — or so Pachter’s argument goes.
I don’t completely buy that argument; after all, Amazon.com has plenty of mail distribution centers and the presence or absence of them doesn’t seem to affect sales tax collection one way or the other. I’m more persuaded by the argument that shedding physical discs is a way to dodge the Video Protection Privacy Act, whose protections were written with physical media in mind and which currently prevents Netflix integration with Facebook. Mergers & acquisitions rumors are always tricky, because they involve so much speculation and multiple parties have so much incentive to play public games for private gains.
However, Netflix stock is certainly cheap these days, which means that whether or not this was all a grand plan of Hudsucker Proxy proportions, some options that seemed unthinkable months ago have to be considered to be on the table. This is why other analysts besides those at Wedbush are taking the proposition seriously. An Amazon purchase of or investment in Netflix could give an Amazon Prime-enabled device like a tablet or set-top box a tremendous boost. Amazon then would own the device and the software service.
Of course, you could make the same argument for Microsoft buying Netflix to run on Xbox and Windows 8 tablets, or devices powered by Google or Apple or any other company with a comparable profile buying Netflix. But there are very few players like Amazon and Netflix who’ve focused on and nearly perfected digital recommendations and web interfaces and both physical and digital distribution.
Even as rivals, they couple well. Right now, Netflix is unique: a premium channel without a network. That’s what’s radical about it. Could it be just as disruptive with a powerful partner or partners backing its play? Can it continue to grow and transform the video content industry without even one partner in its corner? That’s the dilemma Netflix faces now.