Last month, Disney (NYSE: DIS) announced its intention to take its films off Netflix (NASDAQ: NFLX) in 2019 and start its own streaming service. I wrote that Disney could be just the first of many media companies with differentiated content to pull their deals with Netflix and offer their own streaming packages.
Indeed, we're already seeing it happen. 21st Century Fox's (NASDAQ: FOXA) FX now offers commercial-free streaming of its current seasons of originals and many series from its back catalog. AMC Networks (NASDAQ: AMCX) offers a similar service. The only catch is customers have to be cable subscribers in order to subscribe to either streaming service. Both started with Comcast (NASDAQ: CMCSA), and FX recently struck a deal with Cox for distribution as well.
All about staying in control
When FX announced its streaming service, CEO John Landgraf wrote, "We have been diligent about recapturing the in-season stacking rights for all current original programming and recapturing the rights to all seasons of a large portion of our legacy of great original series." In other words, it's not renewing deals with Netflix or other streaming video platforms.
President of AMC Charlie Collier wrote, "We continue to build deeper relationships with fan communities across all of our programming." Those relationships are what give networks like AMC and FX the strength to move to a stand-alone model instead of selling the streaming rights of their shows to Netflix. Not only does it have the potential to generate more revenue (albeit at a greater risk), it strengthens the relationship between the network and its viewers. Netflix had a tendency to obfuscate network branding.
Disney likewise has several strong brands for its film studios, and it makes much more sense for Disney to develop a more direct customer relationship than to distribute its films through Netflix.
Ironically, Netflix itself may be the posterchild for networks to take their content off of Netflix. A growing number of subscribers are swayed to subscribe largely because of its catalog of originals. Netflix is proving a strong catalog of original content is enough to get subscribers to pay for a streaming service.
AMC and FX are missing one key ingredient
One of the big things holding back networks like AMC and FX is that they still don't have the infrastructure to control distribution. Disney bought a majority stake in BAMTech, the streaming video technology spun-off from Major League Baseball, in order to support its future streaming services. It also has a lot of experience in handling direct-to-consumer products and the customer service and billing requirements that go along with it. FX and AMC don't have that.
That's why they've initially partnered with Comcast. Comcast provides an easy way to sign up (through its X1 platform), integrates the billing with customers' current cable bills, and has a ton of experience in customer service (the quality of which is always called into question). The networks just have to worry about delivering the product.
Partnering with cable companies means these types of services will be reserved for cable subscribers. Indeed, that's likely what they want for the time being. Cable affiliate fees still provide a huge chunk of revenue for most cable networks. Over time, however, some may see value in breaking away from the cable companies and going completely over the top. It took HBO a long time, for example, but it's finally found a greater opportunity in going direct to consumers.
In the meantime, these services are great for cable as they provide yet another incentive to keep paying that bill every month. They also likely get some affiliate revenue for handling distribution and billing of the services. For Netflix, it puts further pressure on its original content to draw in subscribers and keep them from churning. In the long run, however, more over-the-top options drawing customers away from cable could ultimately benefit Netflix.
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