Can Netflix Afford a Comeback?

This article is from the archive of our partner .

Netflix may have reached a financial roadblock in its plan to win back subscribers. After getting hated on for raising subscription rates and losing premium Starz content, Netflix announced a plan to up its streaming offerings, hoping to win back cred. Unfortunately, it doesn't look like Netflix has any money left for its lofty plans, reports AllThingsD's Peter Kafka.  "We believe the vast majority of Netflix’s domestic streaming spend for 2012 … has already been announced or committed," a J.P Morgan analyst who had met with Netflix told Kafka. "Accordingly, we would not expect Netflix to spend aggressively or announce major new deals until management has better visibility on U.S. subscriber growth." Looks like Netflix's may be straining its financial resources.

There have been some who have been predicting this would come. The market that Netflix is looking to play in -- i.e. paying movie studios for the rights to re-sell their movies to consumers -- is worth billions and there's only so much Netflix can buy up. The big players Netflix is up against are the pay cable channels, who are seeking to defend their own subscription revenues. As Edward J. Epstein explained on Gawker back when Netflix first got into the streaming game, it's very different from simply buying a bunch of DVDs and putting them in the mail. "The problem is that the first sales doctrine does not apply to streaming or downloading DVDS so Netflix must buy digital rights, which is exceedingly expensive for new titles," he noted.

Recommended Reading

Instead of making a deal with studios, Netflix got around the problem by sub-licensing streaming rights from Starz. But that deal ends next year and to make up for the coming hole in its catalog, Netflix has been striking similar deals with TV networks like AMC, Discovery and CW. But as we've seen with the fall-out of the Starz deal, Netflix has the underhand in this situation. Companies can just up and leave if they don't get the deal they want. And there are only so many companies Netflix can afford, which Epstein too predicted.  "But competing in this game, in which the licenses for a slate of two dozen movies can cost in excess of a quarter of a billion dollars, could prove prohibitively expensive," he wrote. The question -- as the J.P. Morgan note asks -- is how many more of these deals can Netflix afford. 

CEO Hastings explained in a shareholder letter recently that his strategy is to get shows and movies on Netflix that no one else has and make Netflix the HBO of the Internet. That's a very different proposition for subscribers than carrying all of the movies and shows you can find elsewhere. So Netflix will have to pick and choose. Earlier this year, it shelled out money for its first studio output deal with DreamWorks Animation. But that was just one tiny win: Dreamworks Animation releases only a few films a year. To  replicate this strategy, Netflix would need many more of these deals. And, in Epstein's opinion, Netflix will never have the kind of money it needs to really make this kind of comeback. "The brutal reality is that Netflix, with only one-eighth the cash flow of HBO, does not have the scale to produce its own material." 

This article is from the archive of our partner The Wire.