Netflix Is Bluffing

27 points by mitultiwari 13 years ago | 44 comments

lazerwalker 13 years ago |

This article is predicated on the argument that he who owns the content gets the revenue.

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.

joe_the_user 13 years ago | |

Or, perhaps equivalently, the article is predicated on the supposition that there will be a single Big Content monopoly/oligopoly that will eventually just translate over to the digital realm.

brianchu 13 years ago |

Firstly, the title is linkbait and is a total non sequitur. What's the bluff? Is Reed Hastings lying when he says Amazon is spending $1B? Probably not, as the author admits. Basically the title is meaningless.

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.

jasonwatkinspdx 13 years ago |

This article makes a couple good points, but the assumption that competitiveness can only be measured in capitalization is stupid. Anyone who believes that need simply review the proportion of acquisitions by fortune 500's that are still competitive in their markets 5 years later.

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.

sriramk 13 years ago | |

Is this really true? If you look at the top grossing movies, they're all studio blockbuster vehicles. The cost of star salaries, huge marketing splashes, etc are still as bad as ever.

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.

ebrenes 13 years ago | | |

To add to what jasonwatkinspdx has said already, it seems to me that this follows the typical pattern of disruption. First you'll see the bottom markets being let go by the big studios and you'll start seeing other independent bodies picking up those lower markets. Until finally the big studios only make up the top segments, if anything the polarization seems to indicate just this type of shift.

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.

jasonwatkinspdx 13 years ago | | |

You can't expect to understand a broad shift if you're only looking at the top grossing movies. That's like predicting the US economy by only looking at Bill G and Warren Buffet's asset sheets.

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.

sami36 13 years ago |

I wish Netflix would transition fast to an HBO model where they produce their own content. I could see them establishing a kickstarter like content crowd-funding option (opt-in) for say 15 $ / month extra where users would vote on shows, finance them & bring them to life. just imagine what/if scenarios would have played out when "Arrested development" was canceled if we had such an option back then.

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

shardling 13 years ago | |

They have the American version of "House of Cards", the original version of which is probably one of the best televesion dramas ever made.

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.

bookcasey 13 years ago | |

I'm not saying a Kickstarter type model wouldn't work, but keep in mind that one episode of a show like Game of Thrones* can cost around five million dollars to produce.

* http://www.westeros.org/GoT/Features/Entry/3988/

conroy 13 years ago | |

Remember that they also have the exclusive rights to the new season of Arrested Development. So it sounds to me like they are moving in the HBO direction.

saurik 13 years ago |

I often find myself using Netflix to watch a movie, decide I want to see more titles by that director or starring that same lead actor, find out I can't stream that movie and would need to wait for a mailing, and then task switch to iTunes for a rental.

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. :()

jmduke 13 years ago |

I have both Amazon Video (through Prime) and Netflix.

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.

bennesvig 13 years ago | |

There's the Roku, but that's not a solution from Amazon. It's half the price of Apple TV though.

qq66 13 years ago | | |

I switched from an Apple TV to a Roku for Plex, but the Roku's usability is far worse.

pavanky 13 years ago | |

I have an amazon prime app on my ps3. Works great.

mtgx 13 years ago | |

You can use Amazon Video with Google TV.

jerrya 13 years ago |

Netflix's problem is that there are no switching barriers to keep viewers loyal to Netflix.

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.

mdasen 13 years ago |

The problem with VOD is that Hollywood holds all the cards (as the article points out). With DVD, Netflix had leverage because the movie studios sold DVDs. Fair use and first sale offered Netflix the leverage and cover to get content at reasonable prices. With VOD, Hollywood can negotiate rates to their liking. I'm sure a part of Hollywood wouldn't mind Netflix dying with the logic being that customers would buy more DVDs if that happened (I'm not saying that would be the outcome, but that seems to be the logic that parts of Hollywood might employ).

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.

duaneb 13 years ago |

Is he really using market cap to determine success?

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.

mitultiwari 13 years ago |

Netflix focusses on movie/tv-series subscription model (streaming+dvds), and they are laser focussed on improving consumer experience in this area. On the other hand, Apple, Google, Amazon focus on other businesses (hardware, advertising, and e-commerce). That's why I think Netflix will survive, and that's why startups survive and thrive: Focus!

smsm42 13 years ago | |

The problem is for avid tv-series watcher (I admit I am one) netflix is a very bad solution. The obvious problem is that they do not have the fresh stuff. I wouldn't mind some delay, but when it's a season worth of delay, it stops being useful. This, however, is not the worst part - I also watch some old ones. But even there - netflix has way less than full collection, some seasons are missing, some episodes are missing from otherwise complete season, etc. And there's no way for me to track which episodes I already watched, make a list of my favorites to re-watch, or do any other useful things with them. The should at least do something like next-episode.net, but they could probably do even better. But they don't seem to be focusing there, unfortunately...

w1ntermute 13 years ago | | |

This is where torrents come in handy. It's amazing how easy it is to grab a whole season of a show in 720p (if it's just aired) or 1080p (if the Blu-ray set is out). Yesterday I torrented season 3 of Downton Abbey - it won't even air (in the US) until January! I use Anigrate[0] to keep track of which shows I've watched.

0: http://anigrate.glacicle.org/

Timothee 13 years ago | |

I was just about to comment about that: browsing for content on Amazon is a terrible experience, because they use mostly the same layout as the rest of their products. Netflix has the advantage of focussing and a single type of products and (hopefully) give a better experience.

Jach 13 years ago |

The reason I got rid of my Netflix subscription is because I have lost the time for the imaginary quota of movies/tv-shows I wanted to see each month to make the monthly payment worthwhile. I have my Prime membership and sometimes I watch stuff on there, but it's always been about the free 2-day shipping, and that's why Amazon will have my business indefinitely (i.e. until I don't need to buy physical things) whereas Netflix lasts only as long as my availability/desire to watch passive entertainment does.

slykat 13 years ago |

I think the guys who will truly disrupt Hollywood will figure out how to produce & distribute content without the Hollywood machine. Youtube was one of the first ones to do this, and I believe there will be many more startups who will continue on this path; the key to beating Hollywood is by not playing their game.

Or in pg's words: http://ycombinator.com/rfs9.html

sown 13 years ago |

So how long until one of the major tech players buys (or we hear rumors or talks of purchasing) a TV network or even a studio?

programminggeek 13 years ago |

Maybe I'm weird, but it seems like netflix has got worse over time. It used to be magical, now it feels a bit clunkier and the selection might be getting bigger, but it's not getting any better.

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.

michaelbuckbee 13 years ago | |

They lost a good deal of their "premium" content when their cross licensing agreement with Stars expired. This included many of what most people would consider their mainstream movies.

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.

etherael 13 years ago |

I think there should be a rule against people knee deep in big, lumbering entrenched monolithic industries making light of the threats they face from smaller, more nimble competition that they don't understand. It's a pattern so frequently repeated that it's probably worth just getting a nice general rule in there against doing so.

But then again, people love to say I told you so, so there's that. .