the on demand fight. (why Netflix can't win)


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3 weeks ago Netflix published their new strategy online:

It's puzzling. They are phasing out DVDs, but don't want to be the 1 stop shop for streaming content.

Why? Because—they can’t win. We explain why.

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the on demand fight. (why Netflix can't win)

  1. the on demand fight.Why Netflix isn’t even trying to win.<br />David Rogier & Jesper SørensenStanford Graduate School of Business<br />
  2. Where do you buy music?<br />
  3. iTunes<br />
  4. Where do you buy books?<br />
  5. Where do you watch on demand TV shows and movies?<br />
  6. Why isn’t there 1 aggregatorofon demand TV shows and movies?<br />
  7. …and just 3 weeks ago, Netflix announced it doesn’t want tobe that aggregator.<br />
  8. Netflixis the physical DVD aggregator<br />But in their own words: they will no longer carry “everything ever made”; they will just stream a “segment” of content<br />Netflix will now be “like having both a motorcycle and a car.” Netflix will be the motorcycle.<br />It’s already happening…out of their own “Netflix Top 100”, only 7 are available for streaming<br />
  9. Why doesn’t Netflix want to be the aggregator? Why isn’t there 1 aggregator?<br />
  10. one reason.<br />
  11. pricing.<br />
  12. to be the successful aggregator your pricing plan needs to meet 3 criteria. <br />
  13. price discrimination +long tail economics+pricing plan purity<br />
  14. Criteria #1: price discrimination Aggregators must be able to charge different prices for the same product (e.g. more for new releases)<br />Why? Because content providers know people will pay more for it, and they control the content.<br />
  15. Criteria #2: long tail economicsAggregators need to have a profitable way to provide long tail content (e.g. older TV shows, B movies). <br />The problem: people want to pay less for long tail content, but it actually costs more. <br />Why? Content providers charge aggregators a fixed fee for streaming content (even if no one watches it), but variable fees for DVDs. <br />Source: Netflix’s 10k.<br />
  16. Criteria #3: pricing plan purityAggregators need to keep their pricing plans simple. <br />Complex pricing plans slow user adoption and tiered pricing plans signal the (lack of) value of the content.<br />
  17. Who meets all 3 criteria?No one. Yet.<br />
  18. Why not iTunes?<br />iTunes can easily price discriminate (e.g. charge more for new releases).<br />But it can’t support the long tail.<br />People are only willing to pay a tiny amount to see a B movie, but iTunes can’t lower the price.<br />If iTunes charged $0.69 for a B movie, not only would iTunes not make any money because of the fixed royalties, but content providers would hate it. All of a sudden a 2 minute song is worth more than their 2 hour movie.<br />Content providers could start pulling their content from iTunes.<br />
  19. Why not Netflix?<br />Netflix is compatible with long tail economics. Their monthly subscription fee forces infrequent users to subsidize the long tail. Plus, it doesn’t devalue content.<br />Netflix can’t price discriminate.<br />Right now every movie and TV costs the same to watch. <br />If Netflix introduced a “premium service” or a pay per movie service, it’s admitting that the rest of their content is second rate.<br />It also introduces more complexity into pricing – which Netflix has worked hard to simplify.<br />Source: Netflix’s strategy deck.<br />
  20. Why not cable providers?<br />Cable providers (e.g. Time Warner Cable, Comcast, DirecTV) can support pricing plan purity and long tail economics.<br />But they can’t price discriminate if they become aggregators.<br />Currently cable providers offer A content via pay per view and B content through via their premium channels (HBO, Encore, Starz).<br />If cable companies offered B content on demand for an additional fee it would cannibalize their premium (and very profitable) channels.<br />For example, premium channel fees contributed 10% to Time Warner Cable’s video revenues<br />Source: Time Warner Cable’s 10k.<br />
  21. What will happen?<br />
  22. We will have tiered aggregators<br />Premium content: iTunes, Amazon Video on Demand, cable providers, Hulu<br />Netflix will stream the long tail: prior season TV shows, classic movies and some new releases<br />
  23. Aggregators will be squeezed by content providers and delivery devices<br />Content Providers(studios, ABC, Fox)<br />Aggregators(Netflix, iTunes) <br />Delivery(GoogleTV, DVR, Xbox 360)<br />
  24. Content providers will aggregate<br />Content providers will join forces to create their own aggregators (e.g. Hulu)<br />But they’ll struggle to unify their content and divide profits. For example, just recently,Comedy Central pulled it’s content from Hulu to capture more advertising revenue<br />Content providers will continue try to fragment the on demand market. <br />They don’t want one aggregator (unless it’s them)<br />
  25. Delivery devices will fight for it<br />Devices (GoogleTV, Android, AppleTV, Roku, XBOX 360) will fight to unify media<br />Whoever wins, will fight (or buy its way) to be the aggregator<br />Netflix is hedging this risk by getting onto every possible device (Play Station 3, XBOX 360, Roku, GoogleTV)<br />
  26. So, what should Netflix do?<br />
  27. Why is Netflix banishingitself to long tail content?<br />
  28. Why doesn’t Netflix want tobe the aggregator? <br />
  29. Because, it can’t win.<br />
  30. the so what.<br />Netflix can’t be the aggregator. Netflix (and everyone else so far) can’t figure out how to meet all 3 pricing criteria. <br />So Netflix’s best option:<br />Be the best long tail content provider. How? Build the biggest long tail streaming content catalogue. Then sell to whoever wins the aggregator fight (e.g. delivery device, cooperative of content providers).<br />Keep getting on every device possible to get more viewers to watch the long tail—lowering costs.<br />
  31. the end.<br />David Rogier ( Sorensen (<br />