Netflix and the Conservation of Attractive Profits
stratechery.com
stratechery.com
- Do taxis really modularize payment while Uber integrates it? Why is there an additional value capture for Uber in this part of the chain? Taxi drivers have to pay taxi companies heavy rent anyway - which is equivalent to Uber taking a large cut of revenue.
- Do hotels modularize reservations while Airbnb integrates them? I think it's arguable that Airbnb is banking on its differentiated offering (homes vs hotel rooms) and lower prices to attract customers to its "integrated" reservation system. But hotel chains have "integrated" reservations too - they just also choose to distribute rooms through other channels (and Airbnb probably does as well).
- The Christensen hypothesis that profits lie in some uncommoditized part of the value chain looks like a bit of a truism - some part of the chain has to offer some supernormal profits, otherwise it wouldn't be much of an industry to run a business in. (And there are probably exceptions: industries massive enough that virtually every part is commoditized.)
That said, as an Econ/Business major, I appreciated his analysis. I'd like to hear thoughts from the rest of you.
1. The shift from cheaply produced, low quality content, to higher quality "must see" shows. It is definitely the must see shows that have drawn me to HBO and Netflix. I don't just randomly watch whatever's on HBO--I have it for Game of Thrones, Silicon Valley, etc.
My use of Netflix is a little more dual-purpose though; there's certainly Netflix-produced shows that I like a lot, but I often find myself nostalgically surfing Netflix to watch old shows like ST:TNG, or to watch favorite movies again. Even though HBO and the different TV providers offer on-demand viewing, there's something about their offerings that makes me much less likely to browse their libraries and watch random content. The paradox is that Netflix's UI is on average worse than theirs, so my preference of browsing shows on Netflix is not a usability thing, it's an emotional thing.
2. The comments about how Netflix has commoditized time since we no longer have to watch shows at a certain time each week. And how this is borne out by their strategy of releasing all episodes at once for shows they produce. I've found, like the author, that releasing them all at once reduces some of the fun and anticipation of watching a new episode and talking about it with your friends. I've also noticed that I tend to binge watch shows when new seasons drop, and tend to fast forward through less exciting parts of the episodes a lot more than normal, since I feel I have to get through the whole season so I can talk about it with my friends. I get really impatient by the time I'm 80% through the season. But at least this shows how aggressively they are committed to giving people their time back and letting them consume the content on their own schedule.
3. I had no idea HBO was producing so many projects at once. Hollywood Reporter said they are working on over 100 projects right now. I didn't consider that Netflix and Amazon could position themselves not just as alternatives to people who couldn't get a seat with HBO, but could also potentially produce the show and get it online faster (e.g. steal good projects from HBO with the promise of fast results, not just taking their rejects). I still think HBO will on average produce higher quality shows for quite some time since they have so much practice at it, but it sounds like they are spread very thin. I would love to read some analysis on how HBO produces their shows and what their org structure is like there.
I would disagree very strongly with regard to Netflix vs HBO UI. HBOgo tries much too hard for a stylish UI, but makes it more difficult to find the things I want to watch. Relative to netflix, their search is very literal and slow, they make no attempt to remember which series I'm rewatching at the time, they can't seem to remember which episode I'm on in that series or what place I paused in a given episode, and the act of trying to jump to a certain time in the video randomly sends me back to the beginning.
Maybe I gave HBO too much credit. Still, I do think Netflix has a bit of a Craigslist/Amazon issue where so many people are used to it working a certain way that it's now hard to change the UI in material ways without causing a drop in revenue. I've used their new web UI, and it's a little better, and I'm glad they dropped their red-heavy color scheme, but it's still basically the same clickable linear lists of shows arranged into a series of rows. I guess I'm just cranky that there aren't more visually interesting ways to discover new shows--I find that my eyes glaze over after a minute or two of browsing with these kinds of UIs, and everyone seems to use them.
I think the worst UI award goes to iTunes though. It is so hard to discover new shows and movies on there. I can find things I already know about, but when I'm searching and trying to find something new and fun, it's hard to find cool stuff. I basically click on related shows for something I already like until I find something new, but it's not fun and I find better recommendations on Netflix.
They could do what Google did with Inbox -- provide an alternative UI on a separate page/app without discontinuing the existing UI.
I think that the kind of direct analytics that Netflix has is making something obvious to execs that never was before. "must see" is a HIGHLY subjective term and there's a long tail.
In other words if you're just looking at aggregates the really popular, cheap to produce shows are the clear winners. Reality TV.
But if you look at segments or demographics, it might become clear that the Firefly/X files/Dr Who demo demands at least one good nerdy/sci fi show at any given time and lacking that, they will cancel their subscription.
Similarly any other particular demo that you want to look at might demand content that fits thematically lest they too start looking elsewhere to spend their entertainment dollars.
In a weird way it's sort-of gratifying that Netflix is storing so much viewing data because I think it will eventually become clear (if it's not already) that "niche" shows really are mainstream for certain groups of people and absolutely worth making.
It can tell you what to make in broad strokes but it won't make quality TV.
I think the worst example of this was Netflix's Marco Polo. It very clearly stitched together several genres, presumably based on netflix viewer data.
That isn't all that different than what broadcast executives do. Look at ratings and make similar shows.
But the problem is they are killing the source of that content. Those cheap old shows were produced by networks. If netflix kills TV nobody is going to license them content.
But I'm not sure that Netflix's subscriber base is signed up for Netflix becoming another HBO. New content is expensive.
I also think the binge viewing of their original content is a bad idea. If I watch House of Cards in 2 days, it's out of my mind the other 51 weeks of the year. Something like True Detective is one for two whole months and people talk about it in real life and on social networks.
Having been with Netflix since before it even supported streaming, as well as through the whole streaming period, the catalog has lost a lot of high-quality back catalog (and is less successful at acquiring new third-party content), in part because content owners are trying to monetize their content through other channels, including their own streaming services. Netflix could live off third-party back catalog content as long as it was essentially alone in the streaming space -- which only lasted as long as that mechanism was a relatively unproven business model.
Note that the exact same thing happened to HBO, which, before it started making original content, was essentially the cable-era version of what Netflix was before it started making original content. But once there were other cable movie channels, HBO needed unique content that it didn't have to get into price wars with other channels -- since these bidding wars meant that the profit was squeezed out of HBO (or the competing channel) to the content owner.
> But I'm not sure that Netflix's subscriber base is signed up for Netflix becoming another HBO.
Short of price-managed mandatory streaming license system, Netflix becoming another HBO was guaranteed if Netflix was successful in demonstrating that streaming was a viable way of delivering the kind of content it was carrying. Content owners were never going to fail to maximize their profits.
They'll have to transition into HBO. But that isn't easy. You are right HBO transitioned from third party content to original, but HBO always hit the same market segment. HBO was always a premium entertainment service.
Netflix has already suffered customer revolts on relatively minor price increases.
Will the Netflix subscriber base pay for a netflix that mostly does original content? I'm not so sure that they will.
Interesting that they don't (can't?) do this for all the shows. For example, Better Call Saul was released on a weekly schedule in the UK in 2015, even though it had already been aired in the US in 2013. I wonder if this was just experimentation with the model or due to an agreement about how the show should be released.