The way Netflix has evolved and has reached where it is today is incredible. A detailed 2 part article on business lessons from Reed Hastings.
3. “By 2011 we realized that many of the firms we were buying from were eventually going to want to run their own streaming service. We had no reliable supply. We had to go vertical since it was not going to be in their interest to sell to us over time.”
Hastings is saying that Netflix understands the dangers associated with “wholesale transfer pricing.” Eugene Wei has written specifically about how the concept applies to Netflix:
“Netflix had a great advantage when First Sale Doctrine permitted them to buy DVDs at the same wholesale price as any retailer since it capped their costs. But in the TV/movie licensing world, the content owner can constantly adjust their price to squeeze almost every last drop of margin from the distributor as you can’t find perfect substitutes for the goods being offered. Ask TV networks if they make any money licensing NFL, NBA, and MLB games for broadcast. Hint: the answer is no. In the digital world, transfer pricing can be even more of a cruel mistress.”