Netflix Is Bluffing
techcrunch.com
techcrunch.com
Let's keep in mind that in the first part of 2013, Netflix is going to be premiering both House of Cards and new episodes of Arrested Development. If they both do well, and Netflix can get more high-quality exclusives in the pipeline (admittedly both rather large 'ifs'), there's a real possibility that Netflix might find themselves in the very compelling and potentially lucrative position of being the first network of Showtime/HBO-caliber content that really understands digital distribution.
Secondly, Kirwin (the author) is making the classic mistake of seeing all these big massive companies entering the market and thus declaring that Netflix is doomed. The problem is that for these companies, video is an afterthought compared to the main product. Netflix is completely focused on video. There have been countless cases of nimbler, smaller companies out-executing larger, broader companies. I can understand why the author makes this mistake - his background is primarily in film production and working at Paramount and Microsoft (the article says he has worked at some startups, but none that I could find on his site).
I find it ironic that Kirwin is calling out tech bloggers for being "wannabe Hollywood analysts," when it seems to me that he is a Hollywood blogger writing as a wannabe tech analyst.
In annoying MBA language: cost of goods for cinematic content is falling rapidly due to technological and social progress, and this is reducing the negotiation power of large integrated production and marketing companies like the big studios.
The cost of script-writing and conceptual development is largely constant and independent of production cost. Nearly every feature of production cost is falling rapidly, from cameras to post production technologies. Even location shooting, which you might assume independent of technological factors, is being rapidly undercut by digital backdrops (which became the norm in cinema quality television shows with shocking speed).
The net effect of all this change is that negotiation power is moving from large integrated studio ventures to original content producers. Small production companies are less dependent on the capital advances, production infrastructure and marketing channels the big studios can offer.
Netflix definitely understands this, and also understands that the current Hollywood players fail to meet significant areas of demand. You see this in their choices of what productions they've funded directly like arrested development. It's a high risk venture, but it's not just a bluff or impossible. They are hiding in the blind spot of nearly all large market players: the unwillingness to abandon or cannibalize currently profitable activities because of changing market conditions.
I don't see any evidence that the COGs for producing the head revenue generators are any lower than what it was, say, 5 years ago.
The Crank movies are a good example of something you couldn't really do 10 years ago. They were filmed on budgets with 10mm to 20mm. Typically a movie involving so many stunts would be far more expensive. Compare to say the Fast and Furious movies which have budgets in the 100mm range.
And while the current financial picture for the studios is hit driven, that's largely because of the high minimum cost to get a production done. As production costs fall films don't have to sell as well to be profitable, creating more of a long tail to the market.
I think you're also seeing some breakthrough into the middle areas where players such as HBO are able to compete with big block buster movies in terms of mind share. Series like Game of Thrones for example opted to be produced in the "lower echelons" instead of being fit into block buster movies. In a way it seems obvious, the material fits better in a series format, etc... but the fact that it is possible should make it clear that 50-60 million budget can compete and in some cases excel that which is produced by a multiple hundred million dollar blockbuster.
That to me is a significant change, hopefully one of many to come.
My point is, if kickstarter can start raising sums as high a 4 Mil $ for project eternity & 6 Mil $ for Star Citizen, the days when AAA movies could be crowd-funded is not far from us. I'm looking forward to the day when big studios & their greedy shortsightedness get disrupted. The penultimate frontier of disintermediation. fingers crossed
Their sitting on a lot of data on both what people say they like, and what they actually watch, and they're no doubt looking to do more content production.
Latest Netflix estimates say that 1 episode of Arrested development will cost 1.5 million $. Going with an average rate of 3$ per episode would mean 500,000 average pledges would be enough to fund such an enterprise. (36$ per user per season)
Two games on Kickstarter, Double Fine Adventure/ Star Citizen had a pledger base of about ~90,000 users. We're half an order of magnitude from that. 2~3 years in internet time is an eternity, I'm confident that producing quality content will soon migrate online. I think the studios obsession with piracy & control will soon backfire on them. Google is going after them with premium channels, Amazon & Netflix are both toying with content in-house & Apple has the market power to eventually twist their arms.
I would be perfectly happy giving Netflix that money; if nothing else, they deserve the iTunes affiliate cut for making me want to buy something at that moment. I realize many people use Netflix because of the flat pricing and wouldn't go for this, but people like me are the "whales" when it comes to media spending, and it might be worth trying to pick up our business.
(Sadly, I bet many people would then see this as a serious conflict f interest against their flat-priced streaming service, and get angry. :()
Yes, they would deserve a cut on most of our iTunes purchases, but for one thing, I don't know what that would amount to. Maybe not enough. (I believe the iTunes affiliate rate is 5%, so that would be $1-$1.50 per TV show season, 25 cents per movie rental)
And indeed it doesn't seem to make sense: let's say they added a "latest season is on iTunes" link. It would tell the user "we are not able to secure the latest content for you". And if they added exclusive rentals on top of the flat fee, it would be tempting to delay the switch from exclusive to regular catalog for how long as necessary. It would be going against everything Netflix has been about from the start: flat-fee for unlimited consumption.
As for the 5%: that's actually a lot of money to buffet their streaming service: a Netflix subscription is $8.00/mo, but they only make $3.50/user/Q[1], or $1.16/mo (so a 15% margin). If I buy a TV show season a month, or rent a few movies, that doubles the amount of money they make off me. (In fact, I probably do both.)
[1] http://seekingalpha.com/article/912051-netflix-don-t-buy-int...
However, while researching that, I discovered the reason why my plan is actually stupid: they make comparatively good money off of their DVD business, at $2.90/mo.
It is then probably the case, for all users (even "whales" like me) that if they can get me to use their DVD service (which they do heavily integrate into their website) that is better for them than if they can get me to use their DVD service it will do better than getting an iTunes affiliate revenue.
Oh, wait, ok, but now I'm confusing myself with my own "if nothing else": what I was actually originally thinking is that Netflix could replace iTunes rentals, offering some content for free and some for pay. That is the business model that the-second-coming-of-Napster had: flat fee for most things, but per incident out of pocket for some items.
From what I understand (it probably isn't important enough for me to pull a reference on it, but I give talks on "the business models of Apple" and have done it before), Apple charges the same 30% processing fee for music downloads that they went with on their App Store, which probably leaves them with 10% after fees and costs, which then is in the competition range for the DVD service.
(I actually find the DVD model weird, as it seems like a short-term solution...either DRM is going to win or it is going to fail, but either way everything is going digital: in another 5-10 years, I find it difficult to believe--but am probably wrong anyway--that the notion of "borrowing a DVD" won't have been entirely replaced by "renting a download".)
Again, though: it is a nasty precedent to set that would lead to a very tempting conflict of interest, so they probably just need to "not go there". It isn't like the-second-coming-of-Napster did very well ;P.
I use Netflix infinitely more because of my Apple TV; the streaming-to-TV ease of use is the simplest I've found, and cheap (since my and my housemates all split the already-small Netflix bill.)
If Amazon had a stronger solution to this use case, I'd be much more inclined to use it. But even if the content is great (and it is -- Amazon Video has a lot of stuff Netflix doesn't), the actual player and delivery leaves something to be desired.
Even they admit that their vaunted queue is worth much less in the streaming world than it was in the DVD by mail world.
Their strength would be the content deals they have, and their ability to obtain future content. But that right now is notoriously bad. Most of the current or best movies of any star or franchise are not available - the older movies are, or the less well known movies. And I can't get this season of Breaking Bad or any TV show.
As far as I am concerned, they only have two things going for them, the better player, with closed captions and reasonable browsing and availability on most platforms.
And their lack of buffering, that is, their infrastructure.
Unless they can obtain content, I think these two last strengths mark them for being bought out by someone that needs infrastructure knowledge and a good player and otherwise has ways of keeping customers loyal and preventing them from switching away.
The flaw in my analysis is that it predicts Amazon purchased Netflix in the past 12 months. Since Amazon has not purchased Netflix, I know I must be missing something.
That's also their biggest strength. Apple's got all their vendor lock in, amazon is trying to build vendor lock in with the kindle fire line, google is trying to build a vendor lock in with google play. If you buy into that ecosystem, it's a good way to keep you. But if you don't want to buy into any specific manufacturer, netflix is great. I can't watch iTunes movies on my android phone, and i can't watch google play movies on my iPad and i can't watch either on my roku, but i can watch netflix on all of them.
With the arrival of the iOS app this summer, I don't think I have a device I can't watch Amazon Instant on (TiVo, a couple of cheap Sony Blu-ray players, iPad, iPhone...)
I think they're right. There's nothing revolutionary Netflix is doing, and if Amazon can't compete on digital content delivery, what they hell are they doing giving Kindle Fires away at almost cost?
Sure there is. Nobody else has Netflix's library. If I bought the shows I watch on netflix from iTunes or amazon, I would probably sink 10x the money in. I've probably spent around $300-400 on netflix over the years, and I've watched many times more content than that. Ad-free, subscription, with lots of content.
Let's look at the competitors: Amazon prime, which is cheaper but has only a few titles that set it apart (West Wing is the one that caught my eye). Of course, prime is worth it even without the video library, so perhaps it's not the best comparison.
Hulu has a much smaller library, and its paid model has ads (which renders it unacceptable for me). As a free service for watching recent TV, it's alright, but that's not really the same market as Netflix.
iTunes, Google Play, etc etc, are only worth it if you watch <$8 of content a month or want to keep up with current television.
And, of course, let's all remember the biggest competitor in the room for the generation that's most likely to consume internet content: piracy. It has the best selection, best price, best quality- it really only fails on a convenience level.
I also think that the download-the-drm-video is destined for failure. People want large collections, and anyone building that collection with video you don't own for that much money is either stupid or has a lot of money.
This is one of the reasons I was saddened by Netflix de-emphasizing DVDs by mail. That part of the business offered them leverage over streaming rates. "Look at it this way: you can offer us movie X for 30 cents per viewing or we can buy a DVD of it and rent it to 200 people for that $20 purchase." It provides a compelling scenario: $20 for 200 people seeing the film vs. $60 for 200 people seeing the film. However, as Netflix's customer base moves to all-VOD and Netflix itself indicates that DVD by mail is going to become a thing of the past, studios see a Netflix without an alternative to whatever rate they set. Netflix used to have an alternative rate: the price of the DVD.
I'm not exactly sure how we should deal with this situation. I don't think VOD services can realistically thrive unless they get similar footing to what DVD-rental businesses got. Specifically, that they can get a show on equal terms to their competitors (ie. Amazon, Netflix, and my hypothetical video startup can all license movie X for 30 cents per viewing or whatnot). In the meantime, exclusives, content that disappears due to renegotiated licenses, content that won't be licensed, etc. will be the status quo. These are bad ideas (it's 1 am and I'm tired), but maybe something like "you can rent by streaming X times a DVD that you've purchased" so that they could pay the DVD's price and that price would cover a number of streaming rentals or a law saying that companies must give substantially equal access and terms on their content.
EDIT: I'm not really commenting on the rest of the article, but public perception (which is really what market cap is) has traditionally been a poor indicator of success. Even just recently, look at ZNGA, GRPN, AAPL ('97 or so). Amazon has 25x the market cap and operated on a 274M loss this quarter. Netflix only lost 8 million.
Of course, Amazon is interesting because- much like netflix- they are operating under the assumption that profitability will come in the long term. I find it quite interesting that investors trust Amazon (who is much older and proven) over Netflix.
Or in pg's words: http://ycombinator.com/rfs9.html
Most of the time now I redbox anything new, hulu what's on current tv, and only worry about netflix for when I want to burn through an older show.
Maybe it was the price hike or the whole period of bad PR that ensued after that, or maybe it's that Amazon Prime keeps looking more appealing every day. Either way, Netflix feels like it lost whatever it was that made it magic in the first place.
That being said, at the current price it is still an incredible bargain compared to direct purchase of even a few of the shows on the system.
But then again, people love to say I told you so, so there's that. .