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Last month, beleaguered video rental chain Blockbuster filed for bankruptcy. While the company's demise can be blamed on a number of factors, it's hard to ignore one: the rise of Netflix.

Netflix, which is now an $8bn corporation trading at just over $153 per share, looks poised to capture a big part of the nascent streaming business.

Standing on the sidelines watching are the movie studios. Sure, they make money off of Netflix, but that's not much consolation. DVD sales continue their decline, and some of the same factors that contributed to Blockbuster's demise still haunt them.

Unfortunately for the studios, the world didn't have to be quite this gloomy. According to The Wrap, major studios once owned stock in Netflix. That stock was acquired prior to Netflix's IPO in 2002. The Wrap explains:

In the late 1990s, Warner Brothers made a deal with Netflix founder Reed Hastings to share revenues on DVD rentals in exchange for a significant number of warrants in the fledgling DVD-by-mail company.

At the time, Warners was looking for leverage against the Blockbuster behemoth's demands -- and as with other DVD pacts, studios followed suit, each taking pre-IPO took stock in Netflix, according to two individuals with knowledge of the deal.

Today, that stock would be worth a pretty penny. But most of the studios sold their Netflix stock in the year following the company's public offering and today hold no interest in the company. Hindsight, of course, is twenty-twenty, but the studios' premature sales of Netflix stock highlights the mistake big media has made over the past decade: long-term challenges are answered with short-term thinking.

Faced with digital disruption movie studios and record labels increasingly sought equity as part of licensing deals with young startups. After all, most of these startups were without deep pockets, and unable to pay exorbitant licensing fees -- in cash. But without content, they had nowhere to go. So many were willing to pay in equity. In many cases, a lot of equity -- equity that could be quite lucrative for their big media licensors down the road if they succeeded.

Of course, success is never guaranteed, and in many cases, the equity owned by big media companies became worthless. Major record labels, for instance, owned significant equity in imeem, which was sold in fire sale fashion to MySpace.

But when big media owned equity in a winner like Netflix, it sold out early, violating one of the most important rules of investing: let your winners run. Certainly, taking some money off the table following an IPO would have made sense, but the trends that have led to Netflix's success are long-term trends.  The movie studios that sold their Netflix stock were blinded by short-term thinking.

So long as big media approaches long-term problems with short-term solutions, it will repeat the same painful nightmare: picking the winning pony and getting off of it before the real race has even begun.

Patricio Robles

Published 21 October, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (2)

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

The studios sold out as their intention was to eventually crush Netflix.

They expected Netflix to crumble later: better to cash out now.

One example of a cabal not succeeding. But given the intelligence the studios had about their own intentions, the only prudent investment decision possible.

almost 6 years ago

Claudio Cocorocchia

Claudio Cocorocchia, Founder & Non-Exec Director at DigitalEntertainment.tk

Great points Patricio. This same short-term view from the studios is also keeping the true potential and development of the digital entertainment industry from exploding. Netflix is a gem in the rough, and not typical of VoD Services. Most Telcos, that offer S & TVoD services are forced to keep pricing above consumers' willingness to pay and content flexibility (DRM) limited or blocked, due to licensing restrictions imposed by the majors. And this is holding the digital media distribution industry back.

over 5 years ago

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