The blogosphere was aflutter earlier this week when news of Netflix’s price hike hit the interwebs.  Customers were understandably outraged by the sudden 60% increase in their monthly subscription rates.  Even before the dust had settled, analysts across the web have provided several theories to explain the sudden price hike.

Adam Knight posited that it was fallout stemming from Sony’s removal of Starz content from Netflix’s streaming platform two weeks ago.  Surprisingly, Netflix’s incredible growth was to blame, having triggered a clause in the contract voiding their license to stream Starz content once a specified ceiling of consumers was reached.  According to Knight, by uncoupling the discs and streaming plans, Netflix would lower their total streaming customers and thus avoid snafus like the Sony removal.  Felix Salmon supported this assertion by pointing out that Netflix still pays the studios a monthly flat-fee directly linked to the number of subscribers, NOT the number of streaming views.

Eric Garland, CEO of digital-media tracking company Big Champagne, went a step further when he suggested that Netflix actually wantedthe outrage. “He’s [Reed Hastings, Netflix CEO] creating dissonance precisely because… those first-run titles [need] to be available more immediately and more widely as a (video on demand) or as a streamed offering.”  Essentially, Hastings is attempting to turn public outcry against the studios to force the newer and higher-profile titles into the world of streaming.  Garland goes so far as to compare Hastings “killing DVD” to Steve Jobs killing the floppy disc back in the 1980s.

Though certainly an interesting and counter-intuitive theory, the “Dissonance Theory” seems to rely on a couple shaky assumptions.  First, that switching entirely to streaming will lower delivery costs.  Some have pointed out that digital delivery of a film costs approximately 5 cents per stream versus 70 cents in postage per disc.  This is far too simplistic a metric, of course, as it fails to take into account the exorbitant licensing costs streaming requires (expected to hit $1.5B by next year) versus the (comparatively) low costs to purchase discs.

Second, it presupposes that Netflix is actively trying to kill DVD.  As the Netflix blog points out: “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs”.  Now, corporate PR is never to be taken at face value, but this certainly sounds like a company that is continuing to invest in DVDs.

It has become increasingly obvious in the past year that Netflix likely cannot afford to shift entirely to a streaming business.  For one, the Studios have been incredibly reluctant to potentially cannibalize their shrinking DVD market, having successfully delayed Redbox’s offerings to at least 30 days after their release on home video.  Now, a Dissonant Theorist could argue that Netflix is positioning itself to challenge the Studio’s position.  But with Pay TV licensing deals still far more lucrative than what Netflix can offer, and with services like HBO GO continuing to gain steam, it would appear that Netflix’s supposed leverage in these negotiations is limited.

Add to this the fact that “The company has actually been losing money on a cash basis and has hidden it with accounting treatments,” according to analyst Tony Wible.  Furthermore, Netflix streaming future hinges largely on the Net Neutrality debate currently being waged between the FCC and Congress.  If a two-tiered internet is ratified, Netflix, who currently enjoys a 30% share of all prime-time web activity, could see its streaming costs skyrocket.

So where, exactly, does that leave Netflix?  Despite initial polls indicating that as many as 55% of customers planned on discontinuing their subscriptions, once the furor settles a bit, we don’t expect to see much dip if any in overall subscription levels.  The reality is that Netflix still offers the best and most convenient product on the market, and even though consumers may either not admit it or simply don’t understand it, the price point for Netflix’s offerings has been seriously undervalued for years.  We expect (or hope) that Netflix will use the additional capital gained by the price hike to license additional Studio content.

One Final Thought: We’ll cover this in greater depth with the next post, but if we were Netflix, we would think long and hard on expanding our DVD offerings.  Specifically: KIOSKS.

NOTE: We need to include a brief addendum to our last Netflix post.  Just today, Variety reported that Netflix will indeed be invading, ahem, expanding to Europe; specifically, the UK and Spain.  So it would appear that Netflix wants to expand its reach not only by filling a void in Latin America but by striking at Europe before LoveFilm/Amazon has a chance to solidify its status on the continent.

We are incredibly proud to announce that the incredible documentary, “The Matador”, was just nominated for an Emmy for Outstanding Music and Sound!

Directed by Stephen Higgins, “The Matador” is the epic tale of David Fandila’s quest to become the world’s top-ranked bullfighter. Heart-wrenching setbacks and thrilling successes dramatize ‘El Fandi’s’ three-year journey across Spain and Latin America and into the pages of bullfighting history.

Here is the official release:

The headline hit our RSS feeder with a proverbial thud Tuesday morning, as we readied ourselves for the shortened week: “Netflix Expanding to 43 Countries in Latin America“.  Now, we had been expecting a similar announcement for quite some from Netflix.  Up to this point, however, the dialogue had always revolved around Europe and, more specifically, how Netflix planned to compete with the already entrenched and expanding LoveFilm.  Following Amazon’s purchase of LoveFilm back in January, the stage was set for an epic battle of billion-dollar companies waging war on a digital battlefield.  Apparently, Netflix had other ideas.

But let’s take a step back for a moment and ask the preemptive question to “Why Latin America?” (though we will get to that shortly) – “Why expand right now?”  To be sure, the company finished the second quarter with 3.3 million new subscribers and 23.6 million overall.  But Reed Hastings, Netflix’s CEO, knew that those impressive numbers would not be sustained for two primary reasons: cost of content and the “30 million ceiling”.

The skyrocketing cost of content at Netflix is a direct result of their shifting business model.  During its first few years of operation, the company’s major expenditures came in two flavors: postage (where they were the US Postal Service’s number one client) and DVDs. Under the First Sale Doctrine, Netflix could lawfully buy the discs at wholesale prices and distribute them to their growing customer base without paying a DIME to the studios.  As soon as Netflix moved away from physical media into the digital space, however, the First Sale protections they rode to prosperity evaporated, and for the first time, they were forced to pay to stream the content. And pay A LOT. As in BILLIONS of dollars in the past year alone.  With no end in sight.

The second and lesser known precipitant of Netflix’s Latin American expansion could really be termed the “HBO Ceiling”.  In short, no pay cable company, including the king, has been able to extend beyond 30 million subscribers, and that number has held for more than a decade.  So despite Netflix’s meteoric growth, the worry on everyone’s mind, especially Hastings, is that they’ve only got about six million subscribers to go before America is maxed out.  Some may scoff at the notion, but consider Facebook.  For two years, the company was adding 50 million users quarter after quarter.  At that rate, they wuld take over the world in a decade. That was until last month,  when the company lost users for the first time in its history and its total active users dropped back below 50% of the US population.

Taken together, now is the perfect time for expansion.  Including multiple territories in their negotiations with the studios (and independents) should allow for increased amortization of the exorbitant licensing fees. And like HBO before them, Netflix will continue to grow its subscriber base beyond the 30 million ceiling.

But back to the more immediate question, “Why Latin America?” The most obvious answer is to delay the inevitable clash with Amazon for European streaming supremacy.  There simply isn’t any competition for Netflix in Latin America.  Furthermore, with most of the region still developing, the licensing costs should be substantially lower than they would be in Europe. For a company that’s already begun to scale back its North American licensing budgets, this is a huge plus.  The “developing countries” strategy provides another advantage: huge growth potential.  Latin American countries showed 4-10+% hikes in national GDP in 2010, compared to 0-4% across most of Europe.  Coupled with the region’s high population growth rate (compared to Europe’s population stagnation or decline), Latin America is ripe for development in the media space.

“Does it have E&O?” is a question we’re asked often by distributors. E&O, or Errors & Omissions Insurance, protects producers from many claims made against their film. Digital distribution is the wild west of intellectual property enforcement, which makes it that much more important to understand (a) why you need a policy and (b) how to obtain one with the appropriate coverages. Even if a producer has meticulously gathered releases and clearances for each second of footage, North American distributors require E&O. Put simply: Your film will not be distributed without E&O.

To learn more about the potential liabilities of filmmaking and how to protect you and your film click here.

On March 17, the Full Frame Documentary Film Festival concluded its four-day event by presenting Pit No. 8 with two awards:

• The Charles E. Guggenheim Emerging Artist Award is presented to the top first-time documentary feature director.
• The Nicholas School Environmental Award honors the film that best depicts the conflict between our drive to improve living standards through development and modernization. (click HERE for the Op-Ed in Scientific American)

On March 29, 2011, Speaking in Tongues was featured at a CONGRESSIONAL BRIEFING on language as a 21st century skill at the U.S. Capitol in Washington, co-hosted by the American Council on the Teaching of Foreign Languages (ACTL) and P21.

The feature documentary “All Over but to Cry” acquired for international representation by EBSWE has been awarded an Emmy for excellence in television by The National Academy of Television Arts and Sciences. The award will be added to the growing list of accolades “All Over but to Cry” has received. Follow the link to read the full article.

“Unconquered” has won the Best Documentary Short at the prestigious American Indian Film Festival.

EBS World Entertainment attended the American Film Market again this year for the 2010 edition. Premiering at the market were the films, “Christina”, “Buffalo Bushido”, “Desdemona”, “The Dark House”, “Heaven, Hell”, “Infinity Himalaya”, “Speaking in Code”, “Not Evil Just Wrong”, “All Over but to Cry”, “Speaking in Tongues”, and “Unconquered”. The films were extremely well received by buyers from all over the world including North America, Europe, and Asia. EBSWE will also be announcing partnerships with some of the world”s top distributors before the New Year.