

Netflix Is Bluffing - mitultiwari
http://techcrunch.com/2012/11/24/netflix-is-bluffing-and-it-will-be-their-downfall/

======
lazerwalker
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
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.

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brianchu
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
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
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
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.

------
sami36
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_

~~~
NegativeK
You want crowdfunding to address shortsightedness? I don't see these as being
compatible.

~~~
sami36
I want crowd-funding to address consumer choice,editorial & artistic freedom,
consumer friendly consumption mechanisms, platform lock-in and profit
concentration. Crowdfunding is very much compatible with all of these
requirements. Theo only thing standing between us & that world is a few
quarters of Kickstarter/ IndieGogo/ Rally/ GoFundme growing their user bases.

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.

------
saurik
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. :()

~~~
Timothee
I was recently thinking of how much money I've spent on iTunes in the past two
years (since we've "cut the cable") and a lot of our purchases were from TV
series seasons that we bought after we watched the first seasons on Netflix
and wanted to catch up with the latest. (Breaking Bad, Sons of Anarchy,
Dexter, etc.)

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.

~~~
saurik
Yeah, as I said, I can appreciate the problem you describe in your last few
sentences: it is a conflict of interest, and it undermines their existing
market. However, right now, they already can't get licensing deals for a lot
of the newest content, so it really is kind of a crummy position for them. :(

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...](http://seekingalpha.com/article/912051-netflix-don-t-buy-
into-a-40-rally)

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.

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

~~~
qq66
I switched from an Apple TV to a Roku for Plex, but the Roku's usability is
far worse.

------
jerrya
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.

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

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.

~~~
dave5104
But how much do you think the average consumer cares about that (or is even
smart enough to think about it)? Sure, we all understand the ecosystems
because we're developers and we follow that sort of thing, but I'm not sure
that the average consumer would see it the same way. If anything, they might
be swayed by the whole "Oh, that will work with my iTunes account!" factor.

~~~
CamperBob2
Netflix's independence is potentially a big deal. In a rational world, the
content producers would see Netflix's platform agnosticism as a big selling
point. No producers want (or at least _should_ want) their hit TV series or
movie to be viewable only on iOS devices or Android devices or Windows
devices.

~~~
SoftwareMaven
If the price is right, producers couldn't care less about platform lock. If
Google, Apple, Amazon or anybody else is willing to pay the right number of
dollars, they can throw the bits into /dev/null for all Hollywood cares.

~~~
CamperBob2
I don't know about that. Nothing like a major motion picture or TV series has
ever been platform-locked, has it? Video games, yes, but not traditional
"mainstream" entertainment.

~~~
duaneb
NFL is locked in. Should be interesting to see when they make the move to
online. There is currently no way to watch NFL online in the US because
networks pay a LOT of money for exclusive rights. With the amount of cash
Apple has on hand, for example, we could see some huge shifts.

------
mdasen
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
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
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
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
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/>

------
Jach
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
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>

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sown
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?

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programminggeek
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
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
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. .

