Is Netflix losing its soul?

September 27, 2011: 11:56 AM ET

Yes, it has to evolve or die. But lost in the drama over its recent bold moves is a big change that cuts directly to the core of its brand.

By Kevin Kelleher, contributor

netflixFORTUNE -- Credit Netflix with this much: It knows how to stay ahead of the game. In the Internet industry today, you either thrive by making bold and original moves, or you languish as you struggle to ape the leaders. Netflix has an idea of where online video is going, and it's lately been making bold move after bold move in hopes of getting there first.

As everyone knows, this is having dramatically mixed results so far. But as Marc Randolph points out, however big the Netflix (NFLX) controversy is today, the company's "relentless focus" remains on what happens tomorrow. Netflix knows that future lies in streaming video in a global market -- and not so much DVDs shipped through the mail in the U.S.

Netflix can export its streaming-video service abroad much more easily and cheaply than it can its original DVD-by-mail service. It has more leverage with studios if it can offer access to audiences in Asia, Latin America and Europe. And so however loud and intense the outrage over Qwikster -- its plan to split streaming from DVDs -- is in the U.S., it's just not a big deal for most of Netflix' future subscribers.

So as much as I loved the old, too-good-to-be-true Netflix subscription package and as little as I'm looking forward to having to manage a second rental queue through something called Qwikster, none of this really worries me in the long run. Netflix is doing what it has to do to remain successful. I get that. What worries me is something else.

To create a streaming-video service with a global audience, Netflix is showing signs of catering to the lowest-common denominator. Recent moves, lost in the brouhaha over the Qwikster caper, suggest it's abandoning niche titles -- classic films, independent movies -- in favor of blockbuster, mainstream fare. Put in technical jargon, it's cutting off its long tail. Put in admittedly dramatic terms, Netflix may be about to lose its soul.

When Netflix CEO Reed Hastings announced the Qwickster move, he buried in the comments a hint that the company would announce some high-profile licensing deals this fall. Sure enough, as the Times reported Sunday, Netflix inked a deal with Dreamworks that analysts estimate will bring the studio as much as $30 million per picture.

That's significantly higher than the $20 million per picture Dreamworks previously paid to Time Warner's (TWX) HBO for the exclusive rights to the so-called "pay-TV window" that opens up shortly after a movie becomes available on DVD. As the Times noted, Netflix has had similar deals for "smaller titles" -- which I guess is a way of measuring independent movies in terms of their short-term box-office potential, rather than their long-term importance.

It's not hard to imagine why Netflix was willing to pay a 50% premium over HBO: In 2013, when Dreamworks films start streaming on Netflix, the company is likely to have tens of millions of new subscribers overseas, subscribers HBO can't reach. But to keep its margins down, Netflix will be pressured to let go of some other titles. That is, they are likely to let go the "smaller" titles that comprised the bulk of the movie library on which Netflix has built its streaming business so far.

This has been happening for a few months. The Criterion Collection is a distributor of classic movies with a modest but passionate customer base. Criterion maintains a handpicked library of 800 movies that may never be blockbusters but will have a long-tail appeal for decades to come. But earlier this year, Criterion began moving its library from Netflix to Hulu Plus, and classic titles from Akira Kurosawa, Roman Polanski and Max Ophuls have vanished from Netflix Instant queues.

Since then, there have been signs that Netflix is breaking its ties with distributors of independent movies. Dana Harris, indieWIRE's editor-in-chief, wrote in a post after the Qwikster controversy,

"Meanwhile, I've already heard from some indie filmmakers complaining that not only is Netflix (sorry, Qwikster) not renewing their DVD deals, it's also not looking to make their films available via streaming. Their movies are no longer necessary to the Netflix or Qwikster business models.

"My dad had a saying, as dads often do: 'Don't forget the facts that built the business.' Sometimes he meant it literally, but it was handiest as a metaphor for any kind of successful partnership: Know why it works and never lose sight of it."

Of course, many of Netflix' customers won't complain about the loss of so many independent and classic titles. And Randolph may be right that Netflix is doing the right thing in maintaining its long-term financial focus. But what he overlooks is that Netflix the long-tail success story is turning into the kind of blockbuster distributor it set out to undermine in the first place.

In the meantime, the non-blockbuster titles of classic and independent movies are migrating to niche sites following the trail that Netflix blazed. Hulu has Criterion, and sites like SnagFilms and Fandor are beefing up their offerings of independent fare.

But as Harris noted, by forsaking independents for blockbusters Netflix won't just be cutting off its long tail, it will be cutting itself off from its own roots. And it's pretty rare that a company continues to thrive after they move away from the very thing that made it a success in the first place.

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