Cord Cliff Coming: What Happens to TV When Netflix Streams Live Events?

Netflix has never streamed a live event, and Reed Hastings says it never will.

Now, that’s a wise comment for a disruptor to put unambiguously on the record — especially since the TV networks could immediately pull their content from Netflix if they ever heard otherwise.

But we all know that occasionally CEOs change their minds.

So that’s why I decided to imagine what would happen if Netflix took on live events.

And as soon as I played out the scenario, it became obvious: Sooner or later, it will.

Live Is the Lifeline of Television

Television incumbents wouldn’t need to wave off cord cutting if they weren’t genuinely scared of it. New data show that 30 percent of U.S. Internet users would consider cutting their expensive and relatively despised cable subscription to watch TV exclusively online.

But even with as much content as digital pure-plays like Netflix, iTunes and Hulu now offer, there’s one outsized variable that’s holding the whole cable bundle together: Live events.

Live events are inordinately valuable. They have ultimate scarcity: They happen “right now,” they provide a focal point around which hordes of people come together, and they give their viewers an “I was there!” experience beyond just the content itself. They are one of the few must-haves in consumers’ media diets. Personally, I can vouch that the Olympics, the Oscars and the Boston Marathon news are the only television in the last year that drew this cord cutter’s rabbit ears out of the cabinet.

Live events are what cable and broadcast TV have that Netflix doesn’t: News, talk shows and — most important — sports. “The biggest question we get from potential cord cutters is how to watch live sports without paying for cable,” reports GigaOM. There’s still no feasible alternative.

At least, not yet.

Netflix’s Massive Audience for Mass — And Niche — Media

With 29 million streaming subscribers in the U.S., Netflix has more video subscribers than Comcast. And not only does it have the reach, but it also commands an enviable share of viewers’ daily attention: According to BTIG analyst Richard Greenfield, if Netflix was a cable network, it would be the most-watched cable network on the air.

Even more powerful than its reach is Netflix’s legendary ability to target niche audiences with a long tail of content. Netflix won’t need to spend a billion dollars on NFL rights (though, as Peter Kafka notes, one certainly could). Instead, it could start organically, with a live stream of the White House Correspondents’ Dinner roast served up to its political documentary fans and comedy buffs. It wouldn’t surprise anyone if Netflix found that those most likely to watch the Tony Awards are exactly those who have streamed more than their share of “Les Misérables.” And voracious consumers of Pelé and Beckham documentaries would certainly be an easy target for a new offering of pro soccer matches.

If live events and movie reruns sound like the Felix and Oscar of television programming, consider this: The very first two programs aired by HBO when it launched in 1972 were a Paul Newman movie and a New York Rangers game.

Just as HBO started with hockey, bowling and wrestling, Netflix could insert the thin edge of the wedge under various niche interests — and as the audience expands, so can the programming. With TV network ratings shrinking these days, at what point does Netflix surpass NBC in viewership and become a credible bidder for streaming rights to the Olympics? NBC has those rights locked down through 2020, but if the audience continues to shift online, we could be just two more Summer Olympics away from the first completely cordless Games.

Premium Content Means Premium Revenue

Why would a low-priced, all-you-can-eat subscription service add mass-media events to the bundle? Because eventually it’ll need a new revenue stream — and it can’t justify premium pricing without adding new premium content.

Providing exclusive access to must-have programming like “House of Cards” and “Orange Is the New Black” is a great way for Netflix to earn a larger subscriber base in the short term. But in the long term, more (and more varied) exclusive programming will give Netflix the ability to increase its revenue per user, too.

If Netflix can capture an even greater share of viewers’ consumption hours, it’ll be all the more able to justify raising subscription fees in the future. And not only that, but it’ll be able to leverage the strength of its content into entirely new revenue streams. A certain segment of the audience would surely pay a few extra dollars per month for a live streaming pass to view all NHL games, and Netflix could use exclusivity to attract more special interests to join its growing audience. And then, someday, once it has turned pro at making original productions, Netflix could put some of its best content into a premium package that truly competes with HBO.

The old cable standby of subscription plus advertising isn’t the only way to pull in dual revenue streams. Selling ads may never make sense for Netflix, but a revenue boost from premium programming is certainly in its DNA.

Netflix Live Will Be the Cord-Cutting Catalyst

When Netflix starts streaming live events, the results for incumbent industry players could be catastrophic, as it rips the rebar out of the dam holding back cord cutters. Consumer behavior has already begun tilting away from TV, and the fragmentation of TV audiences means we’re depending less and less on the major networks for our entertainment. The tipping point for the mass exodus will be the arrival of better alternatives for viewing live events.

If Netflix listens to its customers (something that cable companies seem to be categorically poor at doing), it will realize that Netflix Live would not only bring new “must-haves” to its offering, but could potentially convert tens of millions of unhappy cable customers into Netflix subscribers. It would also give Netflix the edge to charge more for added value down the road. After all, the economics of cable have proven one thing for certain: People are willing to pay more for more.

Reed Hastings recently told investors to expect a “redefinition and broadening of what Netflix is.” With its original programming, we’ve begun to see the power of adding exclusive original content to the package. The next big step will be live and unplugged.

This is a guest post by Ben Elowitz (@elowitz), co-founder and CEO of next-generation media company Wetpaint, and author of the Digital Quarters blog about the future of digital media. Prior to Wetpaint, Elowitz co-founded Blue Nile.