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What Hollywood Execs Privately Say About Netflix (hollywoodreporter.com)
125 points by kenjackson on Jan 18, 2011 | hide | past | web | favorite | 70 comments

The article pokes fun at Netflix for purchasing little-known, unpopular titles, as if Hollywood is somehow putting one over on Netflix. But what drew me to Netflix initially was its ultra-deep selection of DVDs, which was far better than the local video store. Seems to me Netflix is trying the same thing with streaming, building the biggest catalog as fast as possible so people will view it as the #1 streaming choice, even if Warner Brothers withholds its marquee movies and sticks it with "Pushing Daisies."

Are you really surprised that entertainment executives fail to understand the Long Tail, and are pretty much giving a huge advantage to Netflix?

I find the jabs incredibly amusing. Shows who exactly is in the know, and who isn't...

Forgive me, but I just finished (finally) reading Clayton Christensen's "The Innovator's Dilemma," so naturally, this looks like another prime example to me.

It is amusing to watch the entertainment execs flail around. But apparently, it's not necessarily because they are incompetent. Ironically, it may be their actual competence in their current positions that prevents them from seeing the value in the long tail (or anything else made possible by new technology).

They have long made money a certain way. Now, a new method (internet streaming) is coming along. They would like to use it, but they can't. They can't because it doesn't satisfy their current customers.

Netflix is happy to pay for and take the deep catalog. They are new and therefore able take the risk in creating the new market.

I can't give the theory a good showing myself in a brief comment. But if you haven't read the book yet - go do it now. It's amazing how stuff he wrote ten years ago about older companies sounds like a history lesson to me today about Microsoft, Google, et al.

I think you're giving Netflix the short shrift here. Netflix entered the DVD rental service and beat Blockbuster — they were extraordinarily competent in that arena, arguably more so than most movie studio heads are at their jobs. Now they've moved outside that area of competence by getting into streaming and cannibalizing their own business before any competitors sprung up to do it. They specifically overcame the dilemma you're talking about.

I'd say competence in a business model that is broken is identical to incompetence in a current or rising business model.

If they can't convince their current customers that (whatever) is the way of the future, then I'd argue they are NOT competent. Any fool can be a yes-man and keep doing what the previous guy did because "it always worked before".

I'll second this -- Innovator's Dilemma is a great read, and after having read it, I see it happening in practice all the time.

I haven't read it, but I'm familiar. I'd say it seems spot on.

Did you read the article? I stopped when it started on wild speculation about future deals, but there were two execs quoted. Time Warner's CEO claims that Netflix is eating their lunch, and has not only cut off access to new releases but raised prices for library titles.

The unnamed Disney exec is glad to have an additional market for their library titles. They sound a good bit more clued in than anyone here is giving them credit for. (Though they clearly are fighting tooth and nail to keep consumers from realizing how poor the existing distribution channels are.)

I did. Like I said, shows you who is in the know, and who isn't. Some are good, some are bad. I'm not childish enough to think that they're all completely stupid/evil.

I see this as a benefit too, especially for TV shows.

If you are the type of person that enjoys "critically acclaimed" but "unpopular" shows (Arrested Development, Pushing Daises, Better Off Ted, etc.), the signal-to-noise ratio is dramatically lower than regular Cable TV.

I don't know if right here is the best place to ask, but is anyone else confused about why "Pushing Daisies" could be critically acclaimed? After watching what I could stand of the first 2 episodes, the premise is awesome, the narration is okay, the writing is abysmal, and the characters are as hollow as a PVC pipe. I mean, does it get better later or something?

It's probably not the best place to ask, but I really liked Pushing Daisies and thought the opposite of you :) The premise, eh, the narration okay, the writing really good, and the characters rich and faceted :) Guess there's no accounting for taste, eh? ;)

It's critically acclaimed because it's original. A critic (and I know this having worked as a reviewer) has likely seen every single show that came out every year. When you've seen generic sitcom A through F, you're going to love something that's original right through from premise to characters (the characters do fill out into the 2nd season, but Fuller has a problem that his main character is often a complete vacuum - like Dead Like Me the main character was simply a way too present observer; by the end I literally loved every character but the lead).

Better Off Ted suffered the same problem (different creator) with the main character being vacuous. His boss was great, his colleagues were great, his daughter was great, I even liked the narration because it was out-of-character from the main character.

I find with the major sitcoms people relate to the main character and solely the main character. I think the main reason Chuck Lorre has done so well with Two And A Half Men and The Big Bang Theory is that it's not just the main character that you can relate to, meaning you get the unbelievably avid fans from those "critically acclaimed" shows making huge noise and driving a near doubling in viewers of their shows (the big bang theory went almost 7-million viewers from the first till third season). You don't see this growth in your average series, it tends to start large and decline continuously (Hawaii Five-0 dropped 4-million viewers in the first 4 episodes).

It's by Brian Fuller, who creates a very specific "style" of shows.

If you liked Dead Like Me or Wonderfalls, then you will probably enjoy Pushing Daisies, otherwise you probably won't.

Edit: grammar.

Streaming Pushing Daisies, 30 Rock, and Arrested Development are what made me a Netflix user for life. When I hear from people whose tastes I respect that X is awesome, and X isn't at Blockbuster but is available on DVD and streaming from Netflix, I know who I'm going to be a customer of.

Chris Anderson's The Long Tail describes the very thing you enjoy about Netflix. In fact, company data given to Anderson revealed that an entire 25% of the company's sales are generated from non-blockbuster titles -- the "back catalog".

Its probably more, due to the convenience effect. Its the same reason companies cluster restaurants: people go to the cluster knowing it will have the best selection. In the same way, people go to Netflix knowing they'll have the best selection, and sometimes they end up choosing a blockbuster title.

Here's some research suggesting that the Long Tail isn't just for weirdos like us, but that pretty much everyone dips into the long tail occasionally: http://messymatters.com/longtail

In other words, businesses like Blockbuster figured that since only a small fraction of demand is in the long tail that it's not worth the large cost of supplying it. But just because there's only a small fraction of demand in the long tail doesn't mean that there's only a small fraction of customers who care about it.

That's because it's not, as previous conventional wisdom had it, that most people stick to the popular stuff and there are a fringe of eccentrics who prefer the long tail. Rather, most people most of the time like the popular stuff and, occasionally, like long-tail stuff.

Conclusion: Total demand for the long tail is low; total customers who care about it is high. So ignoring the long tail means alienating most customers.

Agreed. One of the things I've had increasingly reinforced as I've gotten older and experience life more is that, "Not all new things are good, and not all good things are new."

I don't necessarily need to go find "new" music in a world where Floyd's albums still exist. I don't necessarily need to go see some new movie that opens this weekend, if I'm in a world where I can just spin up Casablanca, or The Wizard of Oz, or the original Star Wars, etc. Much of the traditional big corporate publishing industries (movies, music, books, mainly) are all about churning out, promoting and profiting from new stuff. But people don't necessarily want new stuff. They want good stuff. And good old stuff (increasingly) lasts forever, and (increasingly) is increasing in total amount of back catalog to draw from. There's always more good old stuff than good new stuff, and the balance shifts increasingly to the old stuff each year. Companies like NetFlix and Apple and Amazon that make it easy to find and buy all that good old stuff, are going to having steadier profit streams, and arguably higher profit margins, than companies that try to do the big shovel-shit-but-promote-like-hell dance, because the latter business model is taking more risks and has higher operating/marginal costs.

It's amusing to watch various media companies horsetrading the rights to stream a particular show or movie on a given month, worrying about getting one week ahead or one month behind or whatever.

Meanwhile, millions of consumers look at the confusing availability of media and unpredictable technical quality of streaming, shrug their shoulders, and just download high-quality versions of whatever they want to watch at their leisure, thanks to torrents.

iTunes succeeds with a pay model in a world of piracy because it delivers predictable quality, widespread availability, and downloadable content instead of streaming.

That's how they beat the subscription music services, how they beat piracy, and what the movie studios need to learn from.

I regularly see a movie I would be interested in seeing in the theaters and it to my netflix que. Just a few months later it appears at my door (or removed from my que when reviews turn out it was bad). At least for me they overestimate the value of seeing most everything 'right now'. While I could go see the hot new movie, I just got in the mail the movie that came out 3-6 months ago to keep me busy this evening.

As for piracy, just like iTunes between always having a plenty of items from my que for streaming and getting a new disk every few days it is easier for me to use netflix than pirate. That is when I knew they had a model that was going to be very successful.

On the downside I just saw inception last night, but that is the exception and not the rule.

There's some ad where the announcer states "available 28 days before netflix". I mean Netflix should be paying for such good advertising.

It's a Blockbuster ad, and that's why I pay for blockbuster online.

It's a bit different. It takes iTunes all of 10 seconds to download an average song, that's why I use it.

It takes BitTorrent a couple of hours at least to download a movie. With Netflix streaming I'm watching in under 30 seconds.

There's a lot of value proposition left in Netflix's services.

That's the way I see it. I don't want movies littering my hard drive. I just want to be able to watch movies. Netflix lets me do that without pissing off my ISP or forcing me to buy external drives or wait hours for the torrent to finish.

It may not be you individually that's pissing off your ISP, but your ISP is almost certainly not happy with Netflix streaming: http://www.hackingnetflix.com/2010/11/comcast-level-3-in-dis...

There's a big difference between torrenting an HD movie and watching a relatively low resolution streaming movie. I don't have the numbers at my fingertips, but I'd be surprised if the HD movie doesn't use 10x the bandwidth.

This is only marginally relevant (it doesn't directly address the specific codecs in use for std vs high def streaming), but torrenting a full movie in standard def versus high def is usually only a factor of 2-3x, at most.

While that is more data, it's a far cry from an order of magnitude of difference.

Netflix streams HD when possible, and most people I know prefer to download non-HD versions to reduce the wait time. I don't know how Netflix's compression is, though, so it might work out not to be that much more even when it's HD.

Netflix's compression looks (unscientifically) pretty close to standard-def DVDs to me.

Sure, it'd be nice to stream 1080p content, but I know my pipe can't handle it, and I'd much rather watch standard-def content right now than wait 2 days to watch the movie I want in glorious high-def.

It's also why IMHO the PS3's movie rental capability is laughably unusable. When someone goes onto an on-demand system, odds are they want their content right the hell now. The PS3 only supports downloading your rentals.

Now, what would be interesting is a standard for storing streamed video. This way I can rewatch, rewind, fast forward, etc, without hitting my connection again, but also have the perks of beginning right now.

Netflix only streams HD for certain movies and only if your bandwidth is good enough. If your pipe can't handle it, you will indeed be getting DVD-quality video.

Video is a few years behind music. I see no reason to expect it won't follow the same path, though.

Hollywood is being shortsighted about online content distribution.

Consider what happened in online music distribution. The music companies were very resistant in making their content available online, until Napster and others began chipping away at their revenue. Then the music companies aligned with Apple and iTunes. At first, iTunes looked like the answer to the industry's problems, providing a regulated online distribution channel for music (DRM and all). But over time, as iTunes gained market share, Apple gained extraordinary industry power. Now Apple captures much of the value in the music industry, not in the form of music sales but with hardware sales (iPod, iPhone, etc). And even though the music companies have tried to boost the market share of competing distributers (e.g., Amazon) to reduce Apple's industry power, Apple's strength is still largely intact.

I think Hollywood can learn something here. Despite resistance, we know that video content distribution is moving online. It's just a matter of time. If Hollywood is dragged kicking and screaming into online distribution by Netflix, then so be it. But Hollywood must know that if they enter online distribution hesitantly and with just a single partner, then overtime Netflix will gain significant market power and the tables in any negotiations will be turned. It won't be Netflix paying high prices to obtain any licensed content. It will be the content producers begging to get onto Netflix to distribute (and showcase) their content to viewers.

I think the best thing that Hollywood can do at this stage is to embrace online distribution and create a competitive marketplace. This will not only enable Hollywood to retain its industry power, but also increase the availability of content for viewers. Will it increase Hollywood's revenues and profits relative to their historic highs? I doubt it. But at least it won't lead to a dramatic decline in revenues and profits, as what we've seen in music sales. Your thoughts?

Hollywood will inevitably make the same mistakes, like Blockbuster before them, that the music industry did. The publishing industry seems likely to follow in the coming decade. Big business seems unable to make the swift and radical change that is required in these innovative times. Can an industry entirely change itself in a few years even with extremely strong incentive? I think not- but that strong incentive is capable of doing the task very quickly indeed.

These are not mistakes as much as they are inevitabilities. No business wants to cannibalize sales or reduce their prices but these results are almost a given with any form of digital distribution. The music industry tried to avoid this and failed miserably and the film industry will suffer the same fate. The place to look for lessons to be learned is possibly in publishing where so far e-books have been introduced at much the same price-point as the paper versions they might replace. This is greatly aided by the proprietary platforms for delivery so it is not clear whether a similar strategy could the pursued. That Netflix exists and is successful makes this unlikely. It is indeed an interesting time to be in the film business.

The music industry is fortunate in that it has live shows and events to help support it.

Are we being trolled...? FTA: "Seventeen million subscribers later, some people probably wish a clerk would have just refunded the man his 40 bucks." A few thousand ex-Blockbuster employees, and some antediluvian Hollywood execs? Who cares! Maybe I'm just a short-sighted Joe Consumer, but I hear things like "[Hollywood people] are worried about Netflix devaluing content" and "no one fully trusts its motives" and I feel like I'm reading an Onion article. I love Netflix. I would happily pay twice what I'm paying now. If someone created an OS that was impenetrable by viruses, ten thousand Symantec employees would lose jobs, too. It's called "progress".

The article provides explanations like, "“Even though it has a detrimental effect on their business, everyone keeps feeding them content,” BTIG Research analyst Richard Greenfield says." Is there really anything here that isn't exactly like the death knell of the tape cassette industry as CDs became vogue, or the indignant crowing of Newspaper execs who feel so entitled to business that they can't understand why customers are abandoning them in droves?

Am I missing something?

Yes, you are missing something, though your overall point is correct.

"Some people probably wish" refers to the people who stand to lose business to Netflix, not suggestion that consumers will wish it, or that it's bad for consumers in general.

I don't think he is missing the point; I think he is just pointing out the absurdity of this article which seems to value Hollywood opinion and the inefficient Blockbuster's demise over something that 17 million people are happily paying for.

I hereby hypothesize a new category of content:

"Straight to Netflix"

Much like straight-to-video movies that were never put into theaters, but were designed to sell as VHS tapes (later DVDs), there will be content generated for the sole purpose of streaming it on Netflix. Interestingly, there is flexibility in the character of such content: originally it could look like a two hour movie, or like a 22 minute or 44 minute or 60 minute TV show, but there is room for innovation, including episodes that vary in length throughout a season in order to accommodate the story. Or it could be a mix of five minute shorts released on Tuesdays, alternating with 50 minute long-form episodes released on Thursdays. Or it could be a two hour episode, released once per month. Or quarterly.

Yeah, I've long thought it's a great idea that circumvents a lot of the weaknesses of tightly-constrained TV storytelling.

The problem is the economics. It seems people tend to respond negatively to production values below a certain standard. Cable productions run about $2M/episode, which translates to roughly $3M/hour or $50K/minute. Even if you can cut that by 20%, you still need to make a serious amount of money, and that's a lot of $2.10 iTunes purchases or $0.xy (I don't know what that number is, but it's got to be smaller than a dollar) Netflix streams that you've got to get in order to break even. And that's for the production values of "White Collar" or "Leverage", not "LOST" or "Rome"

On top of that, you have the business costs. You've got to pay the overhead costs, and you've got to pay development costs. Half the new shows that get a slot on TV fail, and getting one slot filled requires shooting 2-3 pilot episodes at a couple million a pop. In addition to expansion, you've got to replace your shows every few years, since (a) even the best shows get stale after a while and (b) costs go up every year.

It already exists. Hulu has a lot of exclusive content.

Netflix-style distribution is better for content producers, and far better for consumers.

The only parties it's not better for are the existing content distributors. I, for one, will not weep at their inevitable death. The only reason they aren't dead already is that they're deeply in bed with the content producers (if not the same entities). But in the long term, they can't compete.

I am not so sure about the better for content producer part. How much money would a content producer get per viewing of a movie or how much does Netflix pay for the rights? Is it economical if DVD / non-streaming channels dry up?

Per-item, it's probably less. But overall, they're drastically increasing the size of their potential market.

Real life example: say I have a friend who says "dude, you should totally check out Dexter. Great show!"

In the old content model, I go to Best Buy, see the DVD set for the first season on sale for 39.99, and unless my friend is godlike in his predictions, my response is "hell no."

In the new content model, I log on to my Netflix account and watch the first episode. Not bad. I watch another. Pretty good, and now I'm invested in the story. Whoever produces Dexter is now making free money off of me that they definitely would not have otherwise.

And that's only the first-order effects... by allowing the market to be more responsive to the actual viewing habits of consumers (rather than being mediated by network decisions on what shows to air), consumers will eventually get more of what they want, particularly niche audiences who aren't a fan of standard TV fare. This increases the entire market size, and allows producers of individual shows to expand the market on a per-show basis, something that was previously impossible. Experimental indie shows were simply not on the table, before. Now, they at least have a chance of finding a market.

I am still a little troubled by the economics. Could Dexter be made with Netflix / streaming as it's only distribution model? There is no "free money". Either the compensation is good enough or it doesn't get made. If the streaming model can't support itself then I expect Netflix to stop getting new content until it can be profitable for content providers.

> Could Dexter be made with Netflix / streaming as it's only distribution model?

I don't see why not, once execs are comfortable with it. Of course, it would still air on broadcast TV, which won't go away entirely, and you'd have to run promotional/marketing materials to make people aware of its presence on the streaming sites (the sites themselves would probably do a lot of that for free, since they benefit too).

There's no inherent reason this can't pull in at least as much money as the current model.

> Time Warner is so agitated by Netflix’s streaming that Kent has spoken of “freezing those rights” to maximize a show’s value on traditional TV.

I find it funny that there are still companies / people out there who are afraid of the Internet. Maximize a show's value on traditional TV all you want, but in the long term you will lose big.

Honestly, I think Netflix and Hulu result in me watching more TV. If I miss an episode or two of a show, that starts the slide into quitting the show. But if the show's on Hulu, I can stay caught up, and then go back to watching it live.

Similarly, I wouldn't want to jump into a show halfway through Season 3. It'd be confusing and too much work. And I'm not going to buy two seasons worth of DVDs because the current commercials look cool. So if I can get those back seasons on Netflix then I can become a loyal viewer.

Where are the companies making their money? Ads? If so, put more ads in the Netflix content. It's not that ads that bug me, but my inability to watch a show when I want it.

Seems like Netflix/Hulu should be a win/win -- unless most of their money actually comes from the cable operators (in Time Warner's case maybe this is doubly so being a cable operator).

An interesting statement about their costs in the article, "Sending a disc round-trip can cost as much as $1, and Netflix mails about 2 million DVDs a day, whereas streaming a movie costs the company about a nickel."

An interesting side effect is that copying a dvd is relatively trivial. Saving a streamed movie is harder and you have no motivation to do it.

And for most of us, the reason we rip are: the unskippable content on DVDs and ease of use. So far, netflix watch instantly satisfies both of those, so I can see not needing to rip DVD at some point in the future, except for DVD's I buy (I'd watch the ripped copy, not the physical one).

And as short as a day waiting for the mail or even a trip to the video store can be, having streaming video means Netflix has something to kill time _right now_. I'm not a movie afficianado and neither are most people I know, so the fact that only some movies are available online doesn't present much of a problem (I'll just pick one that looks good enough).

I suppose I'm in the "problem" audience here as I usually go to Netflix with a particular title in mind. The title is almost always not available for instant watching, and I've come to the point where I just assume it isn't on Netflix.

Netflix may have a ton of streamable content, but if you have to approach it from a non-specific point-of-view, it's questionable how valuable a service it is for people like me.

Yes, showing up looking for specific titles is a recipe for disappointment, given how Netflix has to purchase content. But if you like movies, hie thee to instantwatcher.com, and you're going to do OK.

Their streaming business has only been around for < 1 year. That said, it's pretty impressive they have as many titles as they do. Their streaming catalog is only going to grow from here - even if it's at the demise of some in Hollywood.

4 years - Netflix started its streaming service in January 2007.

The article’s interesting but it didn’t really answer the question I wanted answered which is “who is actually making more money?”

Netflix is at the forefront of on-demand visual media and we all know how that story is going to end. I don’t know of anyone who thinks people 30 years from now are going to be catching reruns on TNT instead of requesting what show they want to watch when they want to watch it.

But to me the big question is whether it’s better for media companies to drag their feet or to be an early adopter. To use the HBO example they’re adamantly refusing to license their content for streaming while Showtime has almost all its shows available on Netflix. So from a business perspective the interesting question is whether people will turn to HBO because of its scarcity or choose Showtime shows instead.

Another prediction if other players (Amazon, Apple, Google, and Microsoft were mentioned in the original article) get into the market:

Tiered pricing. Much like basic cable (fairly inexpensive) + movie channels / premium channels / sports packages (increases your subscription cost).

And perhaps eventually the holy grail that the cable industry would never go for: a la carte pricing. Here's the price to add Discovery to your subscription. Here's the price to add Mythbusters to your subscription.

And here's where it gets interesting: I could literally get a subscription to Mythbusters, thereby providing Adam and Jamie with a source of funds that would provide capital for them to create the next batch of episodes. I could get a subscription to the Cohen Brothers, which would fund their next three movies.

Money Quote:

"That means licensing fees can keep climbing as Netflix moves more of its business to streaming and away from DVDs. Sending a disc round-trip can cost as much as $1, and Netflix mails about 2 million DVDs a day, whereas streaming a movie costs the company about a nickel. “We’re direct to the consumer, so we don’t give half our money to a cable company,” Sarandos says. “Our money goes directly to the content providers.”

Some content comes and goes, as in the case with the Timothy Hutton vehicle Leverage, to which Netflix obtained streaming rights through executive producer Dean Devlin. That didn’t sit well with TNT, so when the channel renewed the show for a third season, it made sure to secure digital rights, leaving Netflix with streaming rights to some seasons but not others.

“But TNT had to pay a lot more to secure the rights from Dean — it’s exactly why Netflix is exciting for networks and studios,” Sarandos says. “We’re an exciting new buyer in this space. We bid up the price of content.”"

Eg, Netflix is good for the creators, not so much for the old-economy gatekeepers.

Interesting story about Netflix, I wanted to order "Earth final conflict season 2" from Netflix but they only offer season 1 for some reason.

I spent an hour on their website looking for a way to request they carry a movie, or even a "contact us" email or phone and found nothing. Would it really hurt to let users at least submit something that's missing?

Why do they randomly not have the second season of a series anyway? This sucks.

It's on usenet. Best sci fi ever made!

What terrifies the Hollywood types is they'll lose the mass audience for their product. The days when you can get people to pay $150/month for cable are coming to a close, and the people who control distribution are on their way out.

I don't think there's anything they can do about it, but you can't blame them for trying to stave off the inevitable for as long as possible.

In fact, Netflix is most interested in library stuff, says chief content officer Ted Sarandos, who has been running around Hollywood striking streaming deals with any network, studio and producer who has content to sell. Netflix even likes serialized dramas that traditionally don’t sell for much in TV syndication because, unlike procedurals, they must be aired in order. “I don’t care about last night’s episode,” Sarandos says. “I do want all of last season’s episodes.”

I wish I understood his thinking. Ted, you may not care about last night's episode, but the viewers damned sure do.

I, for one, would rather stop BitTorrenting episodes of shows that are likely to be spoiled if I watch them even a few days after airtime. ("Hello, Dexter? I have money I would like to give you. Why aren't you interested in taking it? No, I am not going to get cable and subscribe to Showtime. Thanks for your, um, input.")

shows that are likely to be spoiled if I watch them even a few days after airtime

How so? Do you mean by hearing/reading things that give away the plot? I often watch shows several months or years after they've aired, but that's just because I have so little interest in TV to begin with.

Yep, some shows are pretty sensitive to being spoiled. And some shows are just plain addictive enough to demand instant gratification.

Ultimately it doesn't matter -- the business model of using one or two shows to sell an entire cable channel can't be sustainable in the long run, especially now that so many people are finding they can get by without cable service at all.

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