> But don't content costs scale on a linear trajectory? Cable companies pay $x/subscriber for a channel - each additional customer doesn't add to some cost mult

> But don't content costs scale on a linear trajectory? Cable companies pay $x/subscriber for a channel - each additional customer doesn't add to some cost multiplier and profit goes up with revenue and cost of content. Netflix doesn't do that, though. There are no channels to speak of, so there is no middleman to negotiate with, there is only the content providers who see you as small peanuts when you're little and a looming, direct threat when you're big. The way Netflix deals work (at least from what we can gather from public articles about the subject) is that Netflix pays a fixed cost for x streams of y content from z provider, with a time expiry for the overall deal. Once the collective user base has used up that streaming bucket or the time has expired, Netflix has to re-negotiate to fill it again. In other words, in 2005 when Netflix only has 500k subscribers and online video is impossible to monitize, handing them a multi year exclusive deal with a 5 million streams for $100 million (pulling these numbers directly out of my ass, just to be clear) is no big deal, you just made $100 million on something that was formerly worthless, good for you. However now it's the year 2011 when advertisers are paying better money for online ads, online viewing is exploding and eating into your traditional sources of revenue, and Netflix is riding their 2005-era deal all the way to the bank. Now letting them get away with that deal is viewed as tantamount to content theft in the eyes of the providers. Suddenly to secure the same deal you got for $100m, will now cost you $500m. Multiply that by every content provider in the industry, and you can plainly see why Netflix is stuck between a rock and a hard place right now.