Netflix and Distribution: The Unsung Story of Copyright Content

Without any intention to bruise any professional sensitivities, my 20 years or so in the pedagogy of copyright has underscored that, in the classroom, the primary poles of interest are the production of copyright content, on the one hand, and the use of copyright, on the other. The balance between these two considerations will differ depending upon whether one espouses a high protection or low protection view of the copyright system. Whatever this balance, left behind, at least in the classroom, is the issue of distribution of content.

From an historical perspective, this is somewhat surprising. Afer all, the printing press ushered in the institution of the publisher, which in the 16th and 17th centuries enjoyed monopoly-like status (read--The Stationers Guild here) until, at least in England, it had its wings clipped by statute in the early 18th century (read--the Statute of Anne here). This is no dry historical commentary. from that time and until now; the proper way to view copyright is a triangular interaction between the creator, the public and the publisher (as the agent of commercialization and distribution). For whatever reason, however, the publisher tends to be shunted to the side when copyright is viewed from the "pure IP perspective."

I am reminded of these thoughts as I follow the Netflix saga. In a word, there is no more compelling story from the point of view of copyright distribution than that of Netflix here. In its first incarnation, it served as the disruptive challenger to the home movie rental, as it pioneered the mail delivery of DVD contents (and figured prominently in Chris Anderson's exposition of "The Long Tail" paradigm here for distribution in a world free of brick and mortar limitations). Success followed, but the company realized that any model of content based on tangible content products was itself challenged by the potential of online distribution of contents directly to the user's home. No more post, no more packaging, indeed, no more physical CD product. It is Netflix's efforts to secure its position in this field that define the focus of its current efforts.

The most recent development in this regard was an item that appeared this week about the reported efforts of the company to become an acquirer of orignal content. See, e.g., here, the article by Greg Sandoval ("Just Try to cut off Netflix's content supply") that appeared on CNET News on 16 March, itself based on a report in Deadline.com. According to this report, Netflix is in talks to secure the rights to stream the original series "House of Cards", produced and directed by David Fincher, who brought us "Social Network", and which stars Kevin Spacey. Netflix is supposed to have offered Media Rights Capital an amount in the neighborhood of $100 million dollars for the series, outbidding distribution heavyweights HBO and AMC.

So what is the strategic big deal about this development? Consider the following points:

1. The source up to now of Netflix's content has been TV or movie content that was already screened before its availability on Netflix. The problem here is that, at least to some reports, efforts are afoot to reduce Netflix's ability to attract top flight content and to limit its access largely to program contents of lower quality.

2. The reason for this move, if true, is the claim that "Netflix is a discounter." Purveyors of content are wary of Netflix. Profit margins are tumbling as consumers continue to purchase fewer DVDs in favour of rentals. Margins for rentals are less than the sales of such products, and the Netflix business model threatens to reduce these profit margins even more as it pays, at least in the eyes of the content industry, less than "top dollar" for the right to distribute such content.

3. Netflix offers users access to tens of thousands of movies via streaming at the price of $8 per month. Since it does so, the industry is deathly afraid that users are getting used to obtaining viewing rights to contents "on the cheap." By analogy to the print industry, once users are accustomed to free (or inexpensive) access to online content, it is a herculean task to convince these users to part with more substantial sums for what is effectively the same content. Bad perhaps for the industry, but apparently great for Netflix, which has seen its growth exceed 60% last year.

4. The dynamics of seeking to limit Netflix's access to content is interesting. While still in the DVD distribution business, the studios tried to limit the ability of Netflix to obtain products, with the goal of strengthening the Blockbuster chain. But Netflix found ways to get around this "blockade". In the meantime, Blockbuster has filed for bankruptcy here, proving once again how tactical moves to impair the competitive position of rivals is a poor substitute for a compelling business model.

5. That said, it ramains unclear how Netflix will deal with the content blockade efforts in its streaming business. As Sandoval points out, it is prohibitively expensive to engage simply in a widespread campaign to obtain original content, as Netflix has apparently done regarding "House of Cards". One answer is for Netflix to become more involved in production of contents, directly or indirectly. Another is to find ways to leverage the reach of its distribution network that will make it difficult for content providers to avoid Netflix as the preferred distributor. This is especially so if users indicate their preference for the reduced cost/viewer experience embodied in the Netflix model.

However the Netflix story plays out, what will remain true is that it places the distribution function squarely in the centre of any consideration of content production and use--as it has been for nearly 500 years.