Media Moguls See Netflix, Hulu Video as Top Issue to ‘Navigate’

By Edmund Lee
Dec 7, 2011

News Corp. Chief Operating Officer Chase Carey said the biggest challenge facing the company is digital-distribution deals with Internet companies such as Netflix Inc. (NFLX) and Hulu LLC.

“The digital space is incredibly important,” Carey said yesterday at a UBS AG media and communications conference in New York. “Over the next five years, it’ll be the number one issue we’ll have to navigate.”

Media companies such as News Corp., Time Warner Inc. (TWX), Viacom Inc. and CBS Corp. (CBS) are experimenting with online distribution of television and movie content. The efforts have the potential to create new revenue streams for media companies, though they need to be careful not to cannibalize revenue from cable operators and other partners, Carey said.

“They’re an exciting new dimension to the business,” he said.

Deep-pocketed players have emerged to offer distribution over the Internet. Aside from Hulu and Netflix, Amazon Inc. (AMZN) markets a streaming service and Apple Inc. offers digital downloads. Verizon Communications Inc. (VZ), the second-largest U.S. telephone company, could soon offer a Netflix competitor, according to Janney Montgomery Scott LLC.

Digital distribution, also known as “over the top,” may make the most sense for older video, including TV shows and movies that are generating little revenue elsewhere, said Carey and David Zaslav, chief executive officer of Discovery Communications Inc. Discovery, whose programs include “Deadliest Catch” and “Man vs. Wild,” cut a deal that allows Netflix to offer its shows well after they’re on cable channels.

18 Months And Older

“We were very intrigued by this idea of a new window,” said Zaslav at UBS. “We don’t know what this new window is going to do, but we created a new window, mostly 18 months old and older.”

Time Warner CEO Jeff Bewkes, once a vocal critic of services like Netflix, said he sees value in Internet deals, particularly for older video.

“These kinds of services can definitely add value to all of us if you’re trying to get that obscure movie you haven’t seen yet in a window that’s not the current window,” he said. “Netflix is our friend.”

Netflix and Time Warner recently signed a distribution deal for programs from its roster of shows on the CW Network, owned by Time Warner and CBS.

‘Arms Race’

Netflix CEO Reed Hastings said there’s an “arms race” among online video companies to get the best content, helping pull in customers. He said his company’s primary competitor may ultimately become Time Warner’s HBO Go service, which lets people watch the cable channel’s own shows such “Boardwalk Empire” and movies the channel has negotiated rights for when they want.

“The competitor we fear most is HBO Go,” Hastings said at the conference. “HBO is becoming more Netflix-like and we’re becoming more HBO-like. The two of us will compete for a very long time.”

News Corp. (NWSA)’s Carey said Netflix is evolving into something similar to a cable channel. Los Gatos, California-based Netflix recently secured an exclusive streaming deal with DreamWorks Animation SKG Inc. (DWA), allowing the studio to shift away from HBO.

Content providers like Viacom have been open to exclusive streaming deals as well. Viacom’s Paramount movie division signed exclusive rights to some of its films to Netflix, which CEO Philippe Dauman sees as lucrative.

“The value of our content has increased significantly since we did the Netflix deal,” Dauman said at UBS conference. “We have a very good relationship with Netflix.”

Non-exclusive deals, on the other hand, allow Viacom to sell shows and films to multiple digital distributors.

“The revenues through that form of distribution should increase,” he said.

Hulu’s Value

CBS chief Leslie Moonves told investors at the conference to expect more digital distribution deals in the future.

“Our guys are talking to a variety of people every single day,” he said. “So I don’t think you’ve heard the last of these deals.”

Hulu, which is owned by News Corp., Walt Disney Co. (DIS) and Providence Equity Partners, was pulled off the market this year after an auction because of the video-streaming service’s potential, said Carey. Hulu has a bigger opportunity than Netflix and its value “dwarfed” the proposed offers, he said.