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The problem is that cable companies can't compete with Netflix because they have to compete with themselves. If they offered deals as good as Netflix, they'd "cannibalize" the customers who they now have paying really shitty deals.

It's a classic problem of disruptive technologies covered in "The Innovator's Dilemma." The author's advice is for companies to create independent subsidiaries to take on the new technology, so that "competing with themselves" is internally consistent within the subsidiary, even if it's inconsistent across the company. Certainly a good move when the alternative is obsolescence.

This works better when the subsidiary does not rely on the parent's infrastructure.

In this case, if the subsidiary relies on the parent's pipe to each household, it's easy to imagine the boss of the traditional cable division constantly lobbying the CEO against the subsidiary disruptor; imagine the endless political claims:

- Our margins pay for the fixed costs of the pipe; if this subsidiary compromises our margin, the whole company will be unable to pay our fixed costs!

- This subsidiary should be charged the economic costs of supporting it: let's charge them a fixed rate per line to access the company's infrastructure. By the way, here's our cost accountants' report showing that this fee should be high. It's only fair.

- This subsidiary would only show earnings significant enough for Wall Street to care at a point in the future in which you will probably have moved on in your career, Mr. CEO. In the meantime, you'll be punished by the Street for development costs.

Etc., etc. Even with good intentions, when the air supply for a subsidiary disruptor is provided by the threatened parent, politics will probably win even if it costs the company in the long run.

It might actually make sense for cable companies to do nothing but milk existing customers for as long as possible. Sure, new technology is going to upend their rice bowl, but they don't have to speed up the process and they can make a lot of money in the interim.

I highly recommend the books "The Innovator's Dilemma" and "The Innovator's Solution" by Clayton Christensen. They basically provide answers to all of your questions. Christensen is the one who coined the term "disruption" as it applies to technology and innovation. The premise of the books are that large entrenched companies focus on larger profits and ignore off the shelf technologies that they already have in house because the potential profits seem too small. Other smaller companies start using off the shelf technologies to focus on niche customers and eventually overtake the larger companies. By the time the larger company realizes what's going on, they're playing catchup.

Nintendo used "The Innovator's Dilemma" and "Blue Ocean Strategy" (another book I highly recommend) as the basis for the development of the Wii.

Thanks for referring to "Blue Ocean Strategy"-- I hadn't read that one. "The Innovator's Dilemma" is a great book (in a sea of bad business books).

The problem with your story is that you make it sound like the cable companies were calling the shots. I suspect that if the movie studies went to Comcast and said, "here's our library of movies that you can stream and give us a cut" they would have seriously considered it.

In 2002 they couldn't have gotten the movies to stream. In fact, I'd argue the only reason we've seen it happen today is because the movie industry saw how screwed the music industry got over streaming.

An interesting argument. That so much physical real-estate was once dedicated to video rentals suggests that a single physical media unit produced rental revenue which was a high multiple of its cost -- at least at Blockbuster's height. This also implies that the studios (to be more correct, the intellectual property owners) only received a small fraction of the value their IP provided to consumers. One would think that this state of affairs would have led the cable operators and the IP owners toward an agreement of some sort. Every dollar wasted on a strip mall lease could be a dollar in a combination of their pockets.

The cable companies saw netflix as Blockbuster's competitor, not their own...and were fairly correct in that belief until netflix changed their game to streaming, and streaming of tvshows and fairly new movies..and even so, the streaming of movie titles was never something the cable companies were hugely good at until recently: Movie studies saw their profits as sourced from dvd and vhs mass market sales, and box office ticket sales, not distribution to tv.

So while the cable companies haven't responded well to netflix, I think its important to remember that only recently has netflix emerged as a competitor to the cable companies...and these industries had been respecting one another's monopolies until netflix changed the game.

It seems reasonable to think that the cable companies at first saw Netflix at a threat only to Blockbuster, etc. Too bad for them that they did not take a broader view of their competition. When a person says, "I want to be entertained by narrative" (not that they would really say such a thing explicitly), cable, Netflix, movie theaters, live theater performances, novels, etc. all compete with each other for the person's attention and dollar. Cable had the advantage that it was always there and required little effort to consume on a per-unit basis (meaning, the effort of turning on the TV). However, it had the disadvantage of lacking variety -- much like the airport bookstore compared to a "real" bookstore (purposefully ignoring Amazon to keep the historical perspective intact). It was this unique position of availability which allowed Cable to survive alongside Blockbuster, and everything else I listed above. Netflix tipped this balance.

Some of the IP video solutions coming out from the bigger cable companies are actually pretty good though facing some limited content at the moment. I don't think they can compete against Netflix for movies but as basically cable TV on your computer/phone/tablet it's a pretty good start. In the long term it will probably depend a lot on how people prefer to watch video. Traditional linear programming or on-demand -- though they do integrate with DVR functionality so you still get the on-demand angle to a large degree. Since they've already got people on the hook for cable Internet and most people will want to continue having some level of video service if not for sports/live events alone, I think they're in pretty good shape to compete against Netflix, Hulu, Amazon, etc. The missing piece is still a good set top experience. The vintage late 90's Cisco/Motorola boxes are so antiquated it's amazing. A smartphone I would throw into a trashcan has more power and a better UI.

I would completely agree with you on the Set Top comment. Infact, do you even need a set-top box? I know TV manufacturers are now building units that are capable on connecting straight to the internet or have built in set-top box capabilities. Set-top boxes will not be needed in the future.

Then, Netflix drastically cut the elapsed time with streaming content. That the cable companies did next to nothing to combat this disruption is astounding given that they already owned and controlled a pipe into the customer's house!

huh? cable companies have had on-demand digital streaming for ages, and done through a cable box already installed in the customer's house. comcast has a lot of programming available for free that is included with monthly service, and their pay-per-view rates are pretty cheap.

Speaking for myself and my cable company - their on-demand streaming in 2011 offers a choice of tens of C-grade movies at only $5.95 apiece.

This isn't really a competitive offering against "all the movies and TV shows ever for $8/month". It's embarrassing to even attempt to compare them.

netflix has a pretty crappy selection of streaming movies, too, but my point was that saying the cable companies are doing nothing is not accurate. cable companies have the technology to offer the same service as netflix and have the advantage of being able to offer newer pay-per-view titles and live sporting events.

Oh, we agree that cable companies "have the technology" and could offer the same service. But they aren't. At all. Not even close. And have no intentions of doing so. Ever.

Did I mention that all streamed movies from my cable company expire 24 hours after they start streaming? So if you start a movie at 8PM, watch the first hour until 9PM, and then you come back to it the next day to finish it... well, you better start watching before 7PM the next day, because exactly at 8PM it turns into a pumpkin and disappears. Even if you're in the middle of watching it. Brilliant! Who would ever want to watch part of a movie the next day?

Yes, but with Netflix the price is right. Also, amidst all that crap there are a decent number of good movies.

I'm not sure if they do have the technology. Most Comcast boxes (Motorola, Scientific Atlanta) are only decoding MPEG2 digital streams, I believe.

It would be quite expensive to roll out to all existing customers a DOCSIS Roku box with a QAM tuner. All the RF stuff makes it more expensive to produce, design, and maintain.

Someone else with more knowledge of CATV infrastructure and equipment could please clarify.

Whereas I'd love to get rid of my UK VirginMedia cable box (it crashes often, is slow and I just resent it a lot of the time) but won't - the on-demand movies are cheaper than iTunes and have a comparable selection (not great but reasonably up to date).

But the killer it also has iPlayer and its equivalents from the other four major channels built in. The only competitor to that, functionality-wise, would be to plug a real computer into the TV.

So in this case, cable does offer some real value - enough for me not to cancel my subscription.

"Pretty cheap" is quite a bit more expensive than free. Believe the parent is referring to an all-you-can-eat vs. PPV for your actively selected viewing pleasure.

the last time i used comcast for tv service years ago, they had tv shows and a bunch of regularly rotated free movies. if you subscribed to premium channels, you got a lot of the content from those networks available on-demand as well.

if cable companies deem netflix a serious problem for them, i would imagine it would be pretty easy to step up their licensing agreements and provide more on-demand content.

The front loaded cost of that is pretty high vs. $8 for Netflix though - and we're talking a handful of premium/new releases vs. the Netflix's streaming catalog which has been rapidly growing in size/quality. That said, I can only speak to my experience as a Cox sub from about 4 years back as I've since cut the cord.

I agree that big cable should have the power and leverage to stop the bloodletting. I think it's similar to any industry that has coasted along far too long, thinking that it is too big and powerful to fall.

| I've purposefully suggested the crappiest, most minimalist implementation I could imagine as a thought experiment. Would this have been sufficient to combat Netflix? Presuming identical catalogs, why would I fiddle with snail mail, scratched-up DVDs, etc.? Such an offering certainly would have created an uphill battle for Netflix.

Exactly, it would have just been an additional fee on an ongoing bill, the technology would have also been an easier sell to most people because to operate their selection from their tv than a website, I think for most people especially if this had been offered in the 90s. Your comment perfectly illustrates how little the cable companies did at all to fend off competition. Your comment is one of the best comments I've read on HN in a while, just wanted to let you know and also thanks!

Thanks. I so often think I've written something semi-insightful, but it is entirely ignored. Attention seems almost random.

I am convinced that Netflix will one day be studied as one of the most astute business strategies of the "internet revolution". IIRC, Hastings wanted to do streaming from the beginning but recognized that (1) the bandwidth wasn't available widely enough yet and (2) licensing content for streaming distribution required being a big player. He wanted to be sure he was well-positioned to be the dominant player when #1 (bandwidth) resolved itself and wanted to be big enough to achieve #2 (licensing deals). Doing DVDs by mail, while perhaps not as good of a business, achieved these goals. IANAL, but I think major laws would have to change to prevent Netflix from buying DVD titles and renting them by mail, so he could operate without the permission of the big boys. This strategy also had the interesting property of being a viable business until bandwidth improved (presuming, of course, that the cable operators did not do what I suggested!).

What remains to be seen is whether the studios will still take kindly to this sort of disintermediation. That they did not take earlier action to control this distribution channel is perhaps as big as a mistake as that made by the cable operators.

I agree completely, the DVD-mail rentals are a stop gap measure and trojan horse in one---it's training the customer to use Netflix.com, which will ultimately become the front-stage for their business. Netflix is genius.

|IANAL, but I think major laws would have to change to prevent Netflix from buying DVD titles and renting them by mail.

IANAL either, but I think you're referring to the First Sale Doctrine: The "first sale" doctrine says that a person who buys a legally produced copyrighted work may "sell or otherwise dispose" of the work as he sees fit, subject to some important conditions and exceptions. Section 109(a). In other words, if you legally buy a book or CD, "first sale" gives you the right to loan that book or CD to your friend. Libraries heavily depend on the first sale doctrine to lend books and other items to patrons.

Although studios and record labels could side-step this by selling the dvds as 'licenses.' Not sure though, would love a lawyer to explain this more.

"What remains to be seen is whether the studios will still take kindly to this sort of disintermediation."

I always wonder what's keeping ESPN, Comedy Central, Cartoon Network, HBO, AMC, FX etc from just setting up websites. I realize most of these companies rely heavily on advertising, but why not just charge like $5/month and buy your shows a la carte. I couldn't careless about 99% of what is on cable tv, but I'm railroaded into paying for it. It would seem obvious that someone, especially HBO since they do not need advertising money, could go straight to the customer with quality content and their customers have already shown a willingness to pony up cash.

"I always wonder what's keeping ESPN, Comedy Central, Cartoon Network, HBO, AMC, FX etc from just setting up websites. I realize most of these companies rely heavily on advertising, but why not just charge like $5/month and buy your shows a la carte."

The distributors (cable and satellite cos) and media companies both have self interest in preserving the a la carte model (many people mistakenly assume it's just in the distributor's interest). Let's take a look at the examples you mentioned: ESPN (Disney), Comedy Central (Viacom), Cartoon Network (Turner/Time Warner), HBO (Time Warner), AMC (Cablevision), FX (Fox) are all owned either by distributors or by media conglomerates that own multiple channels and have an interest in pushing 'packaged content' so that when ESPN is placed in the standard package for DirecTV, DirecTV can also be forced to take ESPN2, ESPN3, Disney Kids, etc. into the same tier and pay an incremental per sub fee for each add'l channel. That's a big part of what's keeping media cos. from going a la carte; they've decided that jamming additional channels into lower tiered satellite packages makes them more money than offering individual over-the-top subscription access.

"it's training the customer to use Netflix.com, which will ultimately become the front-stage for their business."

Yes. It's telling that they didn't call it "MailFlix" or "DVDQueue"; they chose a name that focuses your attention on the internet aspect.

The most recent filing of Netflix's annual report goes over some of the inherent risks they see to their business. Potential changes to the applicability of the First Sale Doctrine and ways studios may try to limit its affects is one of the risks they mention.

http://ir.netflix.com/secfiling.cfm?filingID=1193125-11-4021...

all of those networks still have to get carried by cable operators in order to remain viable, and losing ground by stepping on their primary distrubuters' toes would risk too much, I think