​Why you can't have everything: The Netflix licensing dilemma

Commentary: Netflix has shut off VPN users and these paying subscribers are crying foul. But the move is less about keeping the little guy happy, and more about the big end of town.

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Claire Reilly/CNET

It's finally happened. Netflix is putting up its digital fences and cutting off VPN users from accessing content from its international catalogues. That means customers in the UK, Australia, US and elsewhere will no longer be able to circumvent 'geoblocks' and tap into Netflix's international library of movies and TV shows, and instead will be forced to use the locally targeted service available in their region.

The company today announced that any subscribers using a virtual private network (VPN), proxy or 'unblocker' to access an overseas iteration of Netflix (usually the US service, which offers the largest catalogue) will be locked down to their local service in the coming weeks.

The outcry from customers has been swift: Netflix has turned on the very subscribers that have been paying legitimate Earth Dollars to access content that should be available to everyone, regardless of location. In short, Netflix is biting the hand that feeds it.

But here's the thing: You can't have everything, all the time.

It's a painful truth, especially for Australians like myself, where it feels like we're the last to get anything good and, when we do, it comes two months late and for twice the price. It's even more painful when you consider that it's a truth embedded in old-school negotiations between massive corporate entities, and one that rests on the vested interests of legacy broadcasters and content owners.

But the reason behind the VPN switch-off has nothing to do with what consumers want. It comes down to the economics and mechanics of the content licensing industry (there's a thrilling conversation starter if you ever heard one).

When a rights holder releases a new title, they want to get as much mileage as possible from that content. They want to sign different distribution deals in different regions and 'clip the ticket' as many times as possible.

A US-based rights holder might sell a property to Sky in the UK, and then give first run rights to Foxtel's pay TV service in Australia, while also running the show on cable in the US. The last thing content owners want is consumers circumventing individual paid services (and therefore getting around the local distribution contracts) and funnelling their viewing habits through a single streaming service.

While consumers might want this single destination that lets them pay once for all their favourite programs -- a kind of Apple Music for TV and movies -- that's a nightmare scenario for content providers. As one industry insider put it, that arrangement implies a single billing relationship with customers, and that means less money in the long run. If the goal is for rights holders to clip the ticket as many times and in as many places as possible, a single platform is the ultimate Multipass.

But Netflix's major goal is to get global rights so they can amortise the costs of acquiring one show by getting money from subscribers all over the world. Rights holders' aversion to this model is one of the reasons for Netflix Originals, which allow the streaming service to lure subscribers with premium shows whilst cutting out the content-owning middlemen.

Streaming services may claim to be a one-stop shop for all your content needs, but even US Netflix doesn't have everything (despite the overseas perception). You certainly won't find the HBO-owned drawcard "Game of Thrones" on Netflix, whether you're in Miami, Milton Keynes or Melbourne.

It's no coincidence that Netflix announced the VPN cut-off just days after making headlines at CES 2016 with the news that it was launching in 130 more countries, effectively expanding its footprint to everywhere but China.

Netflix has hitherto prevaricated on whether it would ever cut-off VPN users, often mumbling something about VPNs being against its terms of service. But the dollars spoke for themselves: VPN subscribers still pay money after all. Now that Netflix has opened up legitimate services in 130 new countries, even if the local catalogues are slim pickings, shutting off VPN usage won't cut off revenue in those countries. With the bottom line shored up, Netflix can now keep the rights holders happy.

There's another factor at play. When a VPN directs your internet traffic through the US to get American content, that's good for US subscriber numbers. With the US market now virtually at saturation point in terms of customers acquisition, Netflix has been turning its eyes to the global markets for growth. With VPN access shut off, all those US subscribers are now going to come up as customers in the UK, Australia, South Korea, Afghanistan, Antarctica, Burkina Faso...and so on. It's an impressive list for investors and an impressive list for a company looking to prove its global market dominance.

Netflix has no doubt been feeling the pressure from rights holders to shut off its VPN-all-access-Multipass, and in doing so, letting the distributors continue to shore up their individual geo-targeted content deals. And now the rights holders have received their wish. They're the ones with the power to cut off access to the kinds of shows that make Netflix desirable, after all.

It is a truth universally acknowledged that a Netflix subscriber in possession of a good fortune must be in want of all the content they can get. Who knows, we may even see this VPN lockout used as an excuse by some for more torrenting.

While Netflix has been a disruptor, it still needs to negotiate with legacy media companies and look after its big licensing deals in the long run. And while we may see a truly universalised Netflix service in the future, we're still a long way off. Netflix might have "House of Cards," but the content owners hold the aces.

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