Warner Bros. Is Speeding Netflix and Hulu Into Battle

Yesterday, Warner Bros. and Netflix (NFLX) agreed to a new deal that keeps Warner Bros. movies out of Netflix circulation for their first four weeks on DVD. But after that window closes, Netflix has the right not just to push them through the mail, but to stream them online, as well. So by agreeing to wait 28 days, Netflix has convinced Warner Bros. to give them more movie streaming rights than they would have had otherwise. It’s an effort to increase both companies’ success. Warner Bros. gets to sell/rent more DVDs. Netflix gets to increase its streaming library, making existing customers happier and convincing new ones to join. Who said business had to be a zero-sum game?

This is all part of Netflix’s effort to make its streaming business its main business. And thus, in this blog’s opinion, this is part of a larger but still-fledgling battle between Netflix and Hulu. Hulucination believes this clash to be the most important issue facing the streaming industry. Each site has its specialties—movies vs. TV, an archived library vs. most-recent episodes—and each (for now) has a wildly different business model despite using the same delivery medium. This is tension enough. But what makes it extra special is that they can’t exist in separate spheres for too long. The artistic differences between cinema and television have been blurring for the last decade. Thus, a four-episode DVD of Mad Men isn’t that much different than a DVD of An Education.

So at some point Hulu and Netflix will start to overlap in earnest. Hulu can’t get by with such a godawful movie selection—something this blog is also going to harp on excessively—and Netflix may need to start positioning its television archives as a superior feature compared with Hulu’s shallow reserves. I’m a good, capitalist American, so I’m supposed to believe this kind of competition is a good thing—it brings prices down, leads to innovation, etc. And usually that is the case.

But what if we’re building toward an HD-DVD vs. Blu-Ray kind of battle? That, you may remember, was a fight over high-definition DVDs. The analogy isn’t perfect, because that was a war over format, not over content. But during that battle different studios and rental outlets had to align with different formats, eventually leading to Blu-Ray’s victory. The marketplace was both too small and confused to support both formats. Eventually HD-DVD had to die in order to let high-def discs catch on as a medium.

So let’s spitball into the future for a moment. Let’s say media companies get more and more innovative with their contracts with Hulu and Netflix, as we’ve seen with Warner Bros. And let’s say Hulu and Netflix start to realize how attractive it is to own the rights to an exclusive stream of, for example, Harry Potter. They’re going to pay extra money to secure those rights, just like HBO, Showtime, and Starz compete to buy exclusive rights to show them on paid TV. Or, if we want to look at TV series, I can imagine a day when ABC agrees to offer streaming rights on a highly-rewatched show like Lost to only one of the sites. Suddenly we have a platform war, where certain studios are aligned with certain sites. You could, in fact, already argue that this is happening because of Disney (DIS), News Corp. (NWS), and NBC Universal/Comcast’s (CMCSK) ownership of Hulu.

I bring all these irresponsible predictions up to illustrate that this Warner Bros.-Netflix pact is just the beginning. Does it have to play out this way? Of course not. In fact, every time Netflix makes a unique deal like this it probably gives Hulu ideas of ways to structure its own content contracts. (It would have to think hard about a deal that gave it the full archives of, say, How I Met Your Mother in exchange for not streaming it until a season was over, right?) But the industry is building toward a confrontation; whether there will be casualties is still to be decided.