Thursday, October 13, 2011

Netflix versus the Content Owners

In other amusing business news, we see the return of comic antics of Netflix, having gone through their midlife crisis where they decided to separate from their long-term relationship with DVDs and run away with their hot young streaming business, they've now decided to get back together with their DVDs and work things out. Of course, when I see stuff like this, I'm often reminding of this presentation on Netflix corporate culture which I would loosely summarize as, "as you get bigger, you are faced with greater chaos, but instead of creating processes to manage this chaos, we focus on hiring more smarter people who can overcome these issues." Is this a manifestation of a Wile E. Coyote strategy?

Mark Suster has some interesting thoughts on the whole thing in this post, Netflix Redux: Is It Ever OK to Fire Your Customers? For me, I think that the bigger question is how Netflix, the company that kicked Blockbuster's ass and seemed to be poised for a leading role in the online content distribution world a year ago, has stumbled so severely. Now, they seem to be leading a comic dance into irrelevance, piling misstep onto toe-crushing misstep. Perhaps the most surprising thing is that, for an organization that has invested so much in recommendations and understanding their customers, their recent moves seem disconnected and out of touch with their base.

As bad as these recent moves have been, I don't think it's all Netflix's fault. Unfortunately for the Netflix team, they are sort of like where Apple might be in the content world if the iPod didn't become the market leading digital music player, if there wasn't an iPhone or an iPad -- or at least if there were serious competitors to those devices. Consider:

Netflix beat Blockbuster through their long tail model and efficient customer service. Even when Blockbuster tried to play catch-up with long-tail, no-term rentals, Netflix still overwhelmed them with a ton of momentum from frustrated customers used to the movie rental status quo.

As the world's largest DVD warehouse for rent, Netflix was still able to balance long tail customers with new release customers, providing an adequate balance for both. But then, the movie studios and the content providers decided that they wanted a larger piece of Netflix's action. Forcing the deal to make Netflix and Redbox delay new releases for one month was the first strike in the crippling of Netflix. While Netflix probably expected that it wouldn't impact their business significantly since so much of their rental was long tail, I suspect that the underlying assumption that a new release was not immediately available cut into Netflix's traffic -- imagine if all of the Twitter posts that you could see were from 30 days in the past. I know that, as a user, I quit trying to time my DVD returns in order to ensure a copy of that movie that I missed in the theater and really wanted to see.

Blue Ray turned out to be a problem as well. I signed up for the Blue Ray program, paying an extra couple of dollars a month -- only to struggle with the realization that only one device in the house played Blue Ray DVDs. Wanna watch that movie on your laptop before you go to sleep? No way.

All of this lead to a pretty serious disconnect with Netflix's DVD rental service. The last couple of DVDs/Blue Rays that I had sat around here for nearly two months. Admittedly, work was busy and a whole host of other excuses (thankfully, no late fees), but think about the disconnect. I had over fifty movies in my queue, some from a year back. And when I thought about watching a movie -- or advancing one from my queue -- it wasn't the one that they were hyping on television... I couldn't watch that for another month or two. Instead of working together, the great entertainment marketing engine had fractured to the point where none of them were getting my attention.

Of course, there was always streaming -- Netflix did a great job of implementing streaming movies on my iPhone. It worked great, and for a time, I actually found myself watching a bunch of video content on my phone. Unfortunately, their streaming library (like my time) was limited. While it was a nice supplement to lunch, it wasn't holding up as my go-to content provider.

And this is where you get into that whole "like Apple" situation. Early on in the iTunes world, the content providers agreed to Apple's license terms because Apple was going up against free. It was all well and good until Apple started to handle a significant volume of their content traffic -- suddenly, they wanted a bigger piece of the action and $.99 per song wasn't good enough.

As Netflix became the go-to source for movie rentals -- and customers sat around with all of this streaming movie access to play with (and let's not forget how Netflix had secured client relationships with so many hardware vendors), people began using their streaming services. Sure, there were other providers and other models, but with Apple you had to pay to watch and Hulu was a new service that you had to try. With Netflix you already had an account with streaming enabled, all you needed to do was try it -- you were already online, managing your account. What's more, in terms of adoption, all they needed to do was to function adequately; after all, it was already included in the cost of your Netflix account (This is also a source of the problems they experienced when they changed their pricing structure. Instead of just including streaming, Netflix essentially forced all of their existing customers to remake a purchase decision over something they had never really decided to purchase in the first place). 

As the amount of streaming (and their success) increased, others in the value chain started looking for a larger piece of the action. From the cable people like Comcast who watched as Netflix ate their bandwidth pipe and kicked the ass of their sucktastic OnDemand product to the content providers who realized that people would actually watch streaming content instead of Yet Another Real American Lip Sync and Dance Idol -- or any craptacular network show overstuffed with commercials. In some ways, streaming the content long tail turned out to be an effective competitor against the broadcast of the 'syndicated' content archive over 700 channels of commercial television. 

It was at this point that Apple said, "if you don't like our terms and want to sell your content to iPod users, fine -- go sell your content to them through some other channel. We go through iTunes, but you can see if you get your customers to go through some other channel before they go through iTunes. You're plan might work, but we'll bet that people will buy more through us. These are our terms -- your choice." Hardware and infrastructure provided leverage against the content forces. Unfortunately, Netflix didn't have that infrastructure to use as leverage. Netflix versus Hulu? Netflix versus a network-focused content channel? In this war, the platform didn't matter. No leverage, only customer base.

In the end, it will be interesting to see how all of these content distribution channels shake out. I suspect that, as with their relationship with Apple through iTunes, many of the content owners underestimate the value of the Netflix software portion of the distribution pipe. However, it may be too late -- content cost increases and price plan changes may have already cost Netflix it's leadership position in the market. In this case, it's not only the coyote's fault, the content owners at Acme keep selling him solutions that blow up in his face.

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