Up to this point, both video distributors such as cable TV companies and TV networks have preferred the current “bundled” approach to buying subscription TV products. It is fair to say many consumers might prefer an unbundled approach, much as they now buy songs one at a time.

So long as both networks and distributors make more money selling content the bundled way, there is little chance for full development of online distribution where users can easily and affordabily buy shows and programs one at a time.

So the only hope for significant change is a break in the historic bundling model is a significant change in behavior, on a widespread level, driven by major distributors, customers or a change of heart on the part of the networks.

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True, some actual artists and studios might be more amenable to a change. But the networks that license their movies and shows still are wedded to the affiliate fees model that underpins the subscription TV model at the moment. What drives TV economics?

Virtually everybody expects programming costs to continue to escalate, especially in the area of sports programming. That implies ever-higher subscriber fees. At some point, elasticity of demand will become an issue. Affiliate fees are the issue

In similar fashion, studio licensing demands might have driven Netflix to split its business into separate streaming and DVD rental units.

Netflix says it is separating its DVD by mail and streaming operations into two separate business units, with Netflix retaining the current brand name, while a different “Qwikster” brand being created for the DVD by mail business. Netflix splits in 2

“Streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently,” says Netflix CEO Reed Hastings.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies.

Qwikster will add a video games upgrade option, similar to the current upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games.

Hastings says the separate, non-integrated websites will offer greater simplicity for users, though that might be a point of contention.

Each website will be focused on just one thing (DVDs or streaming), and will be even easier to use, Hastings argues. But a negative of the separation is that the Qwikster.com and Netflix.com websites will not be integrated.

Since about 60 percent of Netflix subscribers appear to pay for both streaming and DVD access, the implication is that 60 percent of users now will get two separate bills, have to use two different sites, and see partial sets of recommendations and reviews on each site. If you rate or review a movie on Qwikster, it doesn’t show up on Netflix.

“If you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places,” Hastings says.

What is clear is that it will be better for Netflix. The price move was not a “decision,” so much as a “reality” presented to Netflix from the content owners in Hollywood, argues Bill Gurley, a venture capitalist at Benchmark Capital. The first sale doctrine likely is involved. Basically, under U.S. law a product (a DVD) can be purchased and then lent or sold without further payment of royalties to content owners.

The key point is that “first sale” does not apply to streaming services. If you want to know why content owners prefer streaming to DVD rentals, that’s the reason: they make more money.

Netflix must negotiate for each and every streamed title, and the price of the right to stream that digital title is up to the whim of the content owner. If an owner says “no,” no distributor can get access. Copyright rules under “first sale”
If you assume Hollywood stuidos wanted a price per month per user to license streamed content, there is an economic problem for Netflix. Netflix obviously would prefer to pay only for content that users actually watch.

By separating the two businesses, Netflix actually pays less (if the scenario is correct) because the number of potential subscribers is less. Though susceptible to the charge it has made a bit of a kludge out of its business, Netflix might have been forced to do so for financial reasons beyond its control.

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