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Netflix, Inc. (NFLX) Transforming the Media Industry

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Media syndication is forever changing, and for the better. Here’s how traditional media syndication works:

  1. Major TV networks buy shows from studio producers.
  2. After 80-100 episodes, TV networks syndicate shows by licensing old episodes to smaller TV channels.

Historically, shows with episodes that can stand alone, such as sitcoms like Friends, fare better in the syndication world than shows with long storylines. That’s because viewers rarely watch an entire consecutive season of reruns. Then came along Netflix, Inc. (NASDAQ:NFLX). Netflix is transforming the way people watch shows and the way TV networks sell shows.

Netflix, Inc. (NASDAQ:NFLX)Netflix, king of digital syndication

Digital syndication, Netflix, Inc. (NASDAQ:NFLX)’s specialty, is taking over the after-market for TV shows and movies. Serialized dramas were often risky for TV networks because syndication wasn’t lucrative. Shows had one chance – go big during original air-time, or get dropped. But Netflix changed the formula.

Netflix allows viewers to catch up on old episodes. As a result, serialized dramas, such as “Lost,” have become hugely popular and far less risky for TV networks, especially with Netflix paying good money for exclusive rights. Further, Netflix provided cash to give “The Killing” a second chance after AMC Networks dropped it last year. In exchange, Netflix, Inc. (NASDAQ:NFLX) received exclusive streaming rights in the U.S. and Canada beginning only 3 months after the show’s end.

Netflix, dictator of digital syndication

Did you catch the key word above? Exclusive. That’s the next big change. Right on the heels of Netflix’s value proposition is a whole set of new demands. Syndicating with Netflix means syndicating only with Netflix. And if TV networks want to successfully syndicate serialized dramas, they have to talk to Netflix. Why the exclusivity? Netflix, Inc. (NASDAQ:NFLX) needs it to maintain dominance over competitors HBO, DirecTV (NASDAQ:DTV), and Amazon.com, Inc. (NASDAQ:AMZN). Here’s how the competition stacks up:

Media Provider Number of Subscribers
Netflix 29.2 million U.S. (self-reported)
HBO 28.7 million U.S. (external estimate)
DirecTV 20.1 million U.S. (self-reported)
Amazon Prime 10 million (external estimate)
Hulu 4 million (self-reported)

Data from Netflix, Variety.com, DirecTV, Business Insider, Hulu Blog

Netflix just added two million U.S. members in the first quarter of  2013, surpassing HBO for the first time. Refinancing a 8.5% bond in February gave Netflix a low EPS of only $0.05/share last quarter, but investors aren’t worried. Netflix, Inc. (NASDAQ:NFLX)’s stock price skyrocketed from under $100 in January to over $240 in July, a gain of 140%.

However, Netflix can’t sit back and relax: each rival video service offers significant value to potential viewers.

Competitive bundling

HBO On Demand is Time Warner Cable Inc (NYSE:TWC)’s instant entertainment service, offering viewers anytime access to over 140 HBO programs. In the first quarter, Time Warner Cable Inc (NYSE:TWC)’s revenue from home video and electronic delivery of theatrical and television products rose 4% from the first quarter of 2012 to total $682 million, representing nearly 10% of revenue. Time Warner Cable Inc (NYSE:TWC) subscribers have to pay an additional monthly subscription to get HBO On Demand, but Time Warner’s advantage is owning the HBO network. HBO shows appear instantly On Demand, while Netflix, Inc. (NASDAQ:NFLX) customers have to wait for syndication, which could take up to a year.

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