Netflix and Amazon, Punished by Wall Street: Attention Streamers, the Free Ride Is Over

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For those of us who prefer to digitally stream our home entertainment, Tuesday might have marked the end of the world as we know it.

The headlines focused on Netflix: Late Monday, the company announced that it had lost a staggering 800,000 U.S. subscribers during the third quarter, the result of a customer revolt over a substantial price increase. During the first hour of open trading Tuesday, Netflix stock dropped 37 percent.

But just a couple of hours later, another bombshell: Amazon announced that its quarterly profits had plunged 73 percent versus a year earlier. The company attributed the implosion to soaring new costs and investments, namely selling the Kindle Fire at a slight loss, hiring more employees and – much like Netflix – investing in a new slate of content for its Amazon Prime video service.

Together, both those pieces of news augur badly for streaming customers.

Back when Netflix first launched its streaming service, it was decidedly a side business. And streaming agreements were priced as such. I still remember back in 2006 or 2007 covering a New Jersey startup which was gobbling up streaming rights to classic films that distributors believed to be worthless. But then streaming gradually became the way a significant number of customers accessed Netflix, whether through Blu-ray players, video game consoles, iPhones or iPads. Today, I’m betting I see more moving images via streaming and buffering than I do via cable wires, broadcast signals or DVDs.

In 2011, streaming is everything – and movie studios finally get it. Digital royalties (both rental and purchase) are growing, just as DVD profits are stalling or declining. And accordingly, prices for digital rights are on the rise. As reported by Variety, Amazon pointed specifically to these rising  costs in a Tuesday conference call that addressed plunging profits: “We will certainly be purchasing content for our U.S. business, both paid and free business,” chief financial officer Thomas Szkutak told investors, emphasizing that streaming costs are now chipping away at profits. Which means that like it or not, we’re all going to be paying more at some point in the near future.

(MORE: The Idiot’s Guide to Netflix – Just How Bad Are Things For the Company?)

In all honesty, up until today, I had taken streaming content for granted. And I’m willing to bet most people are in the same boat. If you’re looking to watch a movie or a TV show and do enough Googling, you can easily find it via legitimate sources or bootlegged YouTube channels. Worst case scenario: You might have to download what you’re looking for via BitTorrent, or cope with watching a couple pre-roll ads from the network or studio’s official website. Without paying for a single subscription, you can hunt down pretty much everything.

But this is very quickly changing, and a number of analysts came out Tuesday with the pronouncement: The free ride is over. “We’ve argued for some time that Netflix only has access to so much ‘quality’ content from the major TV and movies studios as this content has so much value in the pay TV ecosystem,” said Michael Corty, an investment analyst with Morningstar. “[Netflix CEO Reed] Hastings talks about increasing content investment in order to satisfy current and new subscribers, but we think the company lacks negotiating power with content providers.”

Vijay Jayant, an analyst with ISI Group, went one step further, claiming that consumers see online video services as “something that’s ‘nice’ to have, but not ‘essential'” and that this dismissive attitude hurts Netflix’s bottom line: “The quality of its content library, in the end, might be catching up with it.” In other words: Given how much digital rights now cost for high-quality shows and films, Netflix has been forced to raise prices beyond the threshold we are comfortable paying.

If the rest of the world is anything like me, we will all reach a point where we prefer streaming and cloud storage to physical media. Up until now, that transition has not only been painless but cheap. But that won’t (and can’t) remain the case forever. For content services like Amazon, Netflix and Hulu, the race is underway to not only lock down streaming rights to as many entertainment properties as possible, but also to develop a new cost structure which will ensure that you and I start paying more for what we’re watching.

The day is quickly coming when we will have to make a choice: How much money do we want to spend for the convenience of streaming? And if we’re not willing to ultimately spend more there, then where do our priorities lie: Basic cable? HBO? DVD libraries? Online rental services? Digital downloads?

Welcome to the new paradigm.

(MORE: TV Shows Now Make Up Half of Netflix Streaming)

Steven James Snyder is an Associate Editor at TIME. Find him on Twitter at @thesnydes. You can also continue the discussion on TIME’s Facebook page, on Twitter at @TIME and on TIME’s Tumblr.

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