The State of American and Chinese New Media

Michael Thai is a filmmaker and entrepreneur based in Los Angeles and Beijing. He has worked as a writer, producer and private equity analyst on both sides of the Pacific. Michael also reports on technology and culture for The Hypermodern.

Netflix, Youku, and the Future of Digital Distribution

There is a battle raging in Hollywood, and it’s getting ugly. The explosive growth of the Netflix customer base, which now has more than 24 million subscribers (more than any individual cable channel), has seen the Los Gatos, CA based company morph, in the last ten years, from an under-the-radar DVD rental service into the leading distributor of movies online.

Netflix’s rise has come at Hollywood’s expense as cable and other traditional distribution windows have refused to buy titles that have hit Netflix, claiming that Netflix’s online on-demand streaming platform robs the cable companies of the ability to sell ads for the same content. In addition to a loss in licensing revenue from cable companies, Netflix has contributed to the decline in DVD sales across the board, as customers opt to rent and stream instead of own and buy. Essentially, Netflix’s model encourages customers to avoid more profitable viewing options for cheaper, online streaming content.

How are the studios fighting back? By limiting the content they license to Netflix, and when they do, giving Netflix the least valuable content. Or, they make Netflix users wait for the good stuff. According to the Los Angeles Times:

Studios have already taken numerous steps to limit Netflix’s appeal. Four studios prevent the company from offering some newly released DVDs until 28 days after they go on sale in stores. Three others keep their films off the Netflix Instant streaming service until they finish airing on HBO — about seven years after their home video release.

These tactics limit the content that Netflix can provide their customers and consequently reduces the value of the service. As the rising cost of acquiring content has affected Netflix’s bottom line, the rental company has passed the costs onto its consumers, raising prices as much as 60 percent earlier this month.

Customers were outraged but Hollywood execs argued that the new pricing plan allows customers to pay less for less valuable on-demand streaming content, or pay more for more current physical rentals, which more accurately reflects the value of the studios’ content.

But perhaps the most cunning studio tactic of all is to cut Netflix out of the equation entirely by cultivating ancillary partnerships and Internet-based distribution channels. In March, Warner Brothers signed a deal with Facebook to rent movies such as The Dark Knight digitally on the popular social networking site. Over the coming months WB will plan to roll out more titles on this “test” platform.

What is Netflix’s response to the Hollywood drubbing? Expand overseas. Netflix announced it would expand its online streaming service into 43 countries in Latin America later this year. In a move to offset content costs with additional revenue streams, Netflix is placing a huge focus on this international push.

Meanwhile, in China…