Facebook prolongs Web TV Pirate World

In 2008, we took a long and serious look (precis is public here) at the evolution of the Online TV world for the Telco 2.0 team, and concluded that there would be a few years of "Pirate World" when economically irrational "FreeConomic" behaviour was the norm, led by companies who were subsidising their entries by money earned elsewhere or were "adventure capital" funded (see diagram above). We estimated this would be for 3-5 years, and in 2008 we were about one year into it, and by 2011 the New Order would emerge, behaving rationally again. Last year there were signs that the previous generation of Pirates (YouTube, Hulu) were starting to look at rational economics (aka being profitable) while other "disruptors" had run out of cash and were on the way out.

However, what we didn't factor in was that some other players then would jump in at this point, hoping to disrupt the Olde New Order disruptors - enter Netflix, and now Facebook. To an extent the Netflix " $7.99 all the video you can eat" deal is economically, um, interesting for a public company without a Big Daddy with deep pockets, but strategically they have no alterrnative (They are in the "if we don't do this we're f*cked" box, I'd predict them to sell out by end 2011).

But Facebook is a new entrant in the ring - today they announced a deal with Warner Brothers, but even more amusing was Goldman Sachs (who has sunk quite a bit of money into Facebook) arguing that they could (someday, maybe beby) become a real force:

Facebook's decision to test digital movie rentals and purchases with Warner Bros. is no immediate threat to Netflix's streaming service, but creates a new potential longer-term online video competitor, Goldman Sachs analyst Ingrid Chung said Tuesday. "Facebook’s foray into pay-per-view does not impact our Netflix estimates," she said in a report. "However, Facebook represents a new potential entrant that few in the investment community were concerned with prior to this announcement, so we believe it does indeed represent an incremental negative for Netflix shares."

She added that Facebook "could some day become a credible threat to Netflix."

For now, Facebook seems to position itself as a pay-per-view platform, "which is more of a threat to other forms of VOD (such as iTunes or Amazon)," Chung said. She added that the social networking site "lacks content, does not have wide distribution across devices that connect to the living room TV, has few people on the payments platform and does not have an incumbent business that is under threat from increasing online video viewership." Longer-term, it could become a challenger and concern for Netflix, she argued, citing Facebook's more than 500 million active users, compared with Netflix’s 20 million subscribers.

The interesting difference here is that Warner/Facebook will try and charge a (30 facepoints - c $3) fee for rental for each movie for now - but the Netflix $7.99 per month for as much as you can watch sets a lower expectation point. Methinks Goldmans are jumping the gun a bit with their hearty approbation, the argument being that the 600m user base is a major opportunity - I'd want to see how regional rights are handled first though (Investment house analysts pumping their own company's investments - lemme see, when do I last recall that happening...), but a new race to the bottom price war is probably imminent - I'd suspect a few more major entrants will be drawn in by this, and Pirate World could be with us a while longer....

Update - my collaborator on the 2008 work, Keith McMahon, has emailed me pinting out that the dealis actually just a licensing arrangement (that emerged in later information, teach me to blog it early...) but also that he thinks our assumptions will not be shaken by Facebook per se:

It uses two really valuable features of Facebook – the fact that The Dark Knight has a fanclub and Facebook credits. From the Warner Bros perspective, Dark Knight was released in 2008 and is already well outside of the exclusivity windows and is available for rental everywhere (iTunes for £2.50). It is also a franchise movie or brand in its own right. Any additional revenues will be accepted with open arms.

I would imagine that in the end, Facebook will end up with a typical agency model similar to the other big renter of movies, iTunes, of 30% with no pricing or exclusivity advantage. For Facebook the advantages are: they can make a profit at this level; as it is long form keeps people on their site for longer; better than pushing the traffic elsewhere and not getting a referral fee. But, it neither going to make them billions or justify the huge valuation. For Warners, the advantages are minimal: it is just another distribution deal but the less they are reliant on Apple the better.

In contrast, I see Facebook as part of the “New Order” rather than “Pirate World” and I think our graph from 2008 is still looking good especially in terms of timing. As Alan mentions, Hulu and YouTube, are coming back into the fold – see also our recent change of stance on YouTube

My response to Keith was that it wasn't somuch Facebook that I saw extending Pirate World, but Uncle Tom Cobbley and all trying togo down this channel now and being faced with having to match NetFlix pricing, which is "piratical" in that it is irrational (in my view, anyway). Keith also reminded me that we predicted far more recourse to law by the Old Order than we have seen so to date.