Netflix – Only Yesterday
Just last month Columbia Business School professor, Jonathan Knee wrote in Atlantic Magazine.
“Netflix…engenders fierce (customer) loyalty…even beating-out reigning champion Apple, among 528 other brands…Most observers expect the company to have over 30 million subscribers by the end of the year. Netflix is the rare aggregator…which (excels) in customer service and (product perfection) by harnessing customer feedback.”
Since Knee’s month-old accolades, Netflix management announced (1) a 50% reduction in projected third quarter subscriber growth, (2) an apology for prompting a million customers to abandon the service in response to price changes, and (3) a formal division of company’s services into (a) streamed video and (b) postal delivered DVDs.
The company’s abrupt status change from “new media darling” to “old media conspirator” among former Netflix advocates, underscores how the media landscape is shifting under our feet. I am reminded of Frederick Lewis Allen’s Only Yesterday. Although published less than two years after the 1929 stock market crash, Allen skillfully contrasted how the Roaring Twenties evolved into a then-deepening Great Depression.
Impending changes in the media industry will be every bit as profound as the economic and social transformation described in Only Yesterday. Netflix streaming merely pioneered a new way of distributing established media content. So long as that is all they do, they will forever remain at the mercy of “Content is King” dogma. They’ll need to pay Hollywood whatever the studios demand. Significantly, the Netflix price changes imposed earlier this summer and the ensuing customer backlash demonstrate that Hollywood is demanding too much. It’s likely they’ll face much tougher negotiations with Netflix in the future.
In our analysis, Hollywood overvalues its content and underestimates the appeal of the Long Tail. The Long Tail refers to a probability distribution in which a large share of the population resides as illustrated. As applied to video the theory implies that while we share interest in poplar content commonly available on television, we also have more narrowly defined interests shared with viewer-groups too small to justify mass market distribution via conventional conduits such as television or motion picture theaters. But the Internet shatters such limitations enabling video content to be made available for vanishingly small audiences.
As for myself, I enjoy watching author interviews on YouTube and other websites. One of my sons is a devoted ice hockey fan who watches most games over the Internet. A friend who is learning to swim competitively spends hours on YouTube watching Total Immersion videos. Video recordings of cultural programming, such as opera, plays, and symphonic performances, have arguably already moved to YouTube.
In short, Internet video streaming is likely to induce a plethora of new programming. Efforts by conventional video programmers to extract ever higher fees for their content will only intensify a growing trend toward alternate programming. It’s one reason Netflix is attempting to develop its own sources by creating shows that have not appeared on TV or in movie theaters.
The one fly-in-the ointment is that the cable and telco companies could work hand-in-glove with conventional programmers in an attempt to maintain the status quo. Specifically, they can continue to make Internet access economical only to subscribers who take a packaged bundle of services such as a “triple play” of (1) Pay TV, (2) landline telephony, and (3) Internet access. They have a near-duopoly on Internet access and can simply price Internet-only service at unattractive rates, or impose usage-based pricing.
Unfortunately, monopolies and duopolies are seldom regulated in a manner truly beneficial to consumers. Typically, regulatory agencies become industry lapdogs, instead of watchdogs, with the result that innovation is too slow and prices too high. Competition alone is the change agent most effective for consumers.
Nonetheless the cable and telco companies may face intensified competition in the future. A growing number of subscribers want to disconnect Pay TV and landline telephony and instead require only high speed Internet access. Since the cable operators and telco’s are reluctant to discontinue bundled pricing, other Internet service providers have an opening.
Examples include Wireless ISPs as well as the ISP subsidiaries of electric utilities. Wireless ISPs normally provide Internet access from fixed base-stations to antennas mounted on subscriber rooftops. It’s kind-of an echo of a time when most television was received that way. Since the industry uses unlicensed spectrum they can move into any market where they can compete economically. Television Band White Spaces will further enhance their abilities. For more information on the industry see our research report, “The Wireless ISP and Cellular Offloading Industry: Analysis and Forecast.”
