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Posts Tagged ‘Streaming’

For over four decades after the Second World War, TV sets had to be connected to antennas to receive broadcast TV programming (i.e., by air) from national media networks. In the two last decades of the 20th century, connections have shifted to networks of cable and satellite TV companies (the shift started earlier in the US; some households connected to private satellite dishes).  Now, in the early decades of the 21st century, TV connections move again, this time to broadband Internet to receive TV video content by streaming, including TV programmes and films. Moreover, video content can be streamed for viewing on Smart TVs, computer screens (desktop/portable), and on screens of mobile devices (smartphones and tablets), via wired or wireless connections (though wired is still advantageous for TV content). What counts for “TV” is more fluid and it is no longer bound to TV sets in the classic form.

The streaming market for TV content is entering lately a new stage of transition. The competition is getting tougher and more crowded as ‘old-new’ players (i.e., established media networks) are entering or stepping up their involvement in streaming of full-programme video content. Netflix has set an example, and a challenge, to the more ‘traditional’ TV companies since 2007, when Reed Hatsings identified the potential of broadband Internet for streaming film content and faded-out Netflix’s model of mailing DVDs to customers. Over the past decade Netflix kept an advantage, though the gap from competitors (e.g., Hulu, HBO-Now, Amazon Prime Video) has been narrowing down. The latest developments, as discussed below, pose a more serious threat already to the business model and status of Netflix, expected to make it much more difficult for Netflix to stay on top. But the overall growing streaming activity by technology and media companies should worry nonetheless the cable and satellite TV companies of the previous generation from the 20th century.

Netflix offers to its subscribers a variety of films (movies) and TV shows, but its prestige relies particularly on its original in-house productions. Its TV series may be found in multiple genres: TV dramas (e.g., Riverdale, The Crown), Comedies, TV Sci-Fi, Crime TV Shows, Anime Series, TV Horror, Documentaries, and Kids & Teen TV. Some series are known also outside the circles of its customers; among its popular series Netflix lists, for instance, Stranger Things.

However, Netflix gives its subscribers access to view many TV programmes from other companies, including highly popular series from the American national networks, and henceforth difficulties are starting to pile up. As media companies like NBCUniversal and Disney (which are tied together) are about to launch new streaming services, they become more protective of their in-house content productions and intend to block competing streaming services from offering their programmes and films. The Walt Disney Company is additionally now in full control of Hulu streaming service (through its acquisition of 21st Century Fox in March 2019). Furthermore, HBO which currently operates the streaming service HBO Now is in ownership of WarnerMedia (AT&T), under its Entertainment division; HBO is preparing to launch HBO Max in 2020, a new on-demand TV service by streaming.

A battle over rights, especially exclusive rights, to screen video content of films and TV programmes between companies of different orientations is unfolding, and this situation signals trouble for a company like Netflix. For example, Netflix had to pay a gargantuan sum of $100 million to continue to screen Friends on Netflix during 2019, but next year the series will move to HBO’s streaming platform as it launches HBO Max. Friends, the sitcom series from the 1990s, has been very popular among Netflix’s customers, since it started showing in 2015, thus putting pressure on the company to keep it, for as long as they could. In attempt to compensate, Netflix committed to pay a considerable sum of half a billion dollars to secure rights to screen Seinfeld (its ‘spin-off’ comic series Curb Your Enthusiasm by Larry David, that is considered more favourable outside the US, will remain an exclusive of HBO Max). Also, the American version of the originally British satirical series The Office that is still available in Netflix’s library will be reserved from 2020 to the new NBC’s streaming service, NBC Peacock. Such difficulties may force Netflix to rely even more on  new and original materials, but investors are debating if those materials, being expensive to obtain, can provide sufficient return to be profitable (“Netflix Feels the Pressure as Competitors Circle“. BBC News, 17 October 2019).

The streaming service Hulu provides primarily original content of NBC and Fox. Its library includes categories of Hulu Originals, Movies, Current and Past Seasons of TV Series, and Kids. Yet Hulu has an additional facet: it avails a service of real-time TV programming. Hulu offers a basic plan, Hulu (for $5 per month), that allows streaming content from its library (with ads) and an enhanced plan, Hulu + Live TV (for $45 per month), that includes 60 TV channels (American), VOD channels and DVR for recording.  As noted above NBC and Fox are actually owned by Disney, which in turn is set to launch in November 2019 a streaming service called Disney+. The Disney Plus service will specialise in films and programmes from Disney’s own studios, plus Marvel, Pixar, Star Wars (Lucasfilms), and National Geographic, and a large selection of Disney classics as well. Yet from a different corner, NBC is going to launch NBC Peacock in April 2020 that on its part will offer TV shows and series of NBC network, films from Universal Pictures and DreamWorks studios, and it promises to provide for viewing more cinema films from Hollywood bigger studios (NBC Press Release, 17 Sept. 2019). It is said to be supported by both advertising and subscription (not clear at the moment if it will be available outside the US/North America). It will be interesting to see how the Walt Disney Company allocates and manages content for viewing across the three streaming services in its control: Disney+, Hulu, and NBC Peacock. It is not unimaginable that one of them will become redundant due to overlap and internal competition.

More concerning is the intention of Disney to preserve for its own streaming services the rights to screen video content, past and present, from the various studios it controls. The company is expected to forgo $2.5 billion in revenue by removing Disney content from rival services [Adam Lashinsky in Fortune Magazine, May 2019 *]. Additional revenue is likely to be lost by taking off also content of NBC and Fox from the libraries of rival services, such as Netflix. Lashinsky raises alarm over this plan of the Disney company because of the financial harm foreseen to be endured; the big question is: will it pay off in the long run by attracting enough viewers-customers keen on watching Disney video content. Competitors will suffer some headache in filling the gap by bringing content from new productions and alternative sources; will their customers miss the withdrawn content enough to switch or to subscribe to an additional service to get access to the ‘worlds’ of Disney, NBC or Fox?

Amazon Prime Video service is challenging Netflix for a while now, especially in investment in original productions. The Prime Video service offers original Amazon TV productions next to TV series from other TV providers (e.g., HBO, CBS), in addition to categories of Movies and Kids. A title ‘Amazon Original’  is flagged upon image frames of programmes credited to Amazon. Multiple genres are available: Drama, Comedy, Kids & Family, Action & Adventure, Documentary, Animation, International, and more. Members of the Prime Video club can view much of the content for no additional fee. The video content can be watched from the Web and with Amazon Prime Video app on mobile devices, with set-top boxes, and on selected Smart TVs. The competition of Amazon with Netflix would become more intense if the more veteran media companies pull content out from their video libraries.

Apple, a prime technology company, is increasing its involvement in the field of TV media with the combination of its Apple TV app and the upcoming Apple TV+ streaming service (November 2019). Apple also will not be shy in investing in original productions. The Apple TV+ service will bring new original stories of Apple (e.g., The Morning Show starring Jennifer Aniston and Reese Witherspoon; the latter already appears with Nicole Kidman in a successful series “Big Little Lies” of HBO). The original programmes will show on top of programmes and films from different premium channels, streaming services (but not Netflix), and cable providers; all can be watched with the Apple TV app on the company’s mobile devices, computers and smart TVs (CNet.com, 16 October 2019).

  • The plans of Netflix range in price from $9 (Basic) to $16 (Premium) per month.  The plans of Hulu exhibit two price extremes ($5 — $45), with advertising on the one hand and Live TV on the other.  Disney is said to charge $7 per month ($70 for a year paid in advance); it promises the service will deliver at a technical (HD) and content quality of the Premium plan of Netflix. The expected starting fee for Apple TV+ is $5 per month. Subscription to Amazon Prime Video seems to require a membership fee of $9 and then $13 per month paid monthly or $119 for a year paid in advance.

Cable and satellite TV companies face a difficult competition from TV streaming services that give viewers great flexibility with often high quality programming content. The streaming option gives a new leverage to the established TV networks and media companies to attract viewers for starting customer relationships directly with them. But the cable and satellite TV providers can still hold an important advantage: bringing a widespan variety of content of different styles and flavours from different sources, not committing to a single external production house, in addition to their own productions. Furthermore, many TV viewers are still likely to want to watch real-time (‘linear’) TV programmes (e.g., news). The TV channels should include channels of the viewer’s own country as well as optional channels from other countries and in other languages. National TV networks already provide an option to view their programmes by streaming on the Internet: live as they show in TV schedule and recorded (e.g., BBC iPlayer allows UK residents to watch programmes of BBC1 to BBC4 channels on demand); some programmes may be viewed for free and some by paid subscription. Newspapers are also producing more video stories for streaming.

However, cable and satellite TV providers should re-consider their models of service and allow much more flexibility of choice of channels by building greater modularity into their TV service plans. Video-on-Demand (VOD) and recording (DVR) services are desirable and appreciated but they are not enough. There is little point left these days in offering ‘basic’ plans with 100+ channels for a high monthly fee when people regularly watch only a small fraction of them. In the age of customization, TV viewers-customers should be given more freedom in building their own bundles of TV channels. More of the company’s income can come from the fees on ‘packets’ or sub-bundles of channels customers add-on to a low-cost basic plan, yet customers will then know they are paying for channels they are truly interested watching (e.g., news and documentaries, classic cinema films 1940s-1980s, British / French / Italian TV, vintage TV series 1960s-1980s, animation, and so on). The sub-bundles should be small and focused.

Building fences around original TV content of one company and barring streaming services of other companies from offering those programmes will not benefit anyone, neither on the provider side nor on the customer-viewer side. A TV service provider can differentiate itself by protecting the exclusivity of a greater part of its original video content (as ‘anchors’) while allowing a flavour of it to be experienced by customers of its competitors. It is no less logical doing so than licensing rights to other broadcast TV networks, cable and satellite TV providers to screen their programmes. Content has to be shared between the TV service providers, for the appropriate credit and fee.

Television viewers are looking more afar and broadly across the TV spectrum to find the kinds of programmes they wish to see in the few hours they have spare to watch TV. But there is probably a limit to the number of different streaming sources they will be ready to subscribe to in order to access a satisfying variety of programmes and films for viewing. Adding streaming services will not help if they become too secluded. That is why cable and satellite TV providers can still have an advantage, yet they need to give more flexibility of choice to their customers. To gain the awareness and interest of TV viewers in the series and films produced by media and TV companies, they have to share their works instead of raising fences between them.

Ron Ventura, Ph.D. (Marketing)

Note:

[*] “Disney’s Latest Blockbuster Isn’t in Theaters”, Adam Lashinsky, Fortune Magazine, 1 May 2019, 179 (5), pp. 5-6.

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Tremors continue to shake ground in the field of television viewing since the start of this decade,  especially with respect to how televised content is consumed. It is possible to say that the concept of television is being transformed. The move of Netflix away from rental of DVDs, delivered by mail, towards online streaming, seems to have signaled the start of this transformation which is affecting the consumers and the media industry together. Netflix is of course not doing it alone, changing how televised video content is made available to consumers — other digital services include Hulu, Amazon Prime, and YouTube, as better known examples. Many consumers, most of all Millennials, are attracted to having better control and discretion of what, how and when they watch video programming content of the kind we are used to associate with TV.

Two primary shifts in TV viewing need to be considered: (1) watching less TV programmes in real-time; but more important and characteristic of the changes in the past decade: (2) watching less TV on the screen of a TV set in favour of screens of personal computers, tablets and smartphones. The first shift is not so new — watching a programme not at the time of its scheduled broadcast can be traced to at least thirty-five years ago thanks to the VCR (Video Cassette Recorder); later on came the DVD, but most DVD sets used by households were non-recorders.

The popularity of watching TV content in shifted-time has increased somewhat more with the introduction of new devices and services, namely Digital Video Recorder (DVR) and Video-on-Demand (VOD). The VOD service has actually created new options for viewers to access a special video library and watch programmes or films that are not available on broadcast channels (not available at all or not at that period).

The second shift noted is more closely associated with the Internet availability of video content, including TV programmes, that is not dependent on traditional broadcasters (networks, but also cable and satellite TV services). Whether the application for watching the content is web-based or a mobile app is less crucial to our matter. Streaming potentially breaks the tie between the televised content and the physical TV set (but that is an option, not a necessity). It is not surprising that new-age digital media companies that offer video content by streaming have been followed by the TV networks worldwide that now allow consumers to view their programmes online (viewing may be free or by paid subscription).

As we look into greater details of various possibilities of viewing televised content, we may find that defining TV viewing is not clear-cut. For instance, if one is streaming the content of a programme (e.g., a comedy episode) ordered from Netflix to a laptop that is connected to a TV set (or streaming directly to a Smart TV), is he or she watching TV? Apparently, 79% of US streamers primarily stream the video content to their TV sets! (CSG International, Insights Blog, 8 Sept. 2016). Vice versa, if one is watching a programme (e.g., evening news) at the time of its broadcast but on a laptop by live streaming, is he or she not watching TV? It can be confusing. Consumers stream TV content of the type of TV series episodes (e.g., comedy, drama, crime), documentaries, news editions, as well as cinema films. The key to achieve greater coherence and consistency may be to define ‘TV’ by the kind of its programming content, not by the technology of devices or distribution platforms (BARB’s Annual Viewing Report: UK’s Viewing Habits, April 2016, pp. 6-7, also see pp. 8-9).

Many consumers, mostly the younger ones (under 35), are turning away from fixed timetable TV programming. They are more selective in regard to the programmes they wish to watch at the time convenient to them. The choice of more savvy TV viewers is getting more in a form of cherry-picking. They may receive recommendations what programmes to watch from friends who have similar tastes or from the online content provider based on their stated preferences and past viewing behaviour (possibly adding what similar-in-kind programmes others are viewing). Consumers may choose to watch, for example, legacy TV series or programmes of a particular genre, as well as new selections of TV-type programmes produced independently by video content providers such as Netflix, exclusive to their subscribers.

For consumers who have less leisure time it may also become a matter of efficiency in allocating their limited TV viewing time to the programmes they really want to watch, thus not being constrained by the programmes scheduled for those hours. People watch only a small portion of the channels available to them in their TV cable or satellite packages, and are less comfortable with their inflexible programming plans. TV viewers wander to other channels such as a VOD service of their regular provider or by streaming from online video content providers.

When looking at ‘traditional TV viewing’, which includes live TV (aka real-time or linear) and adjunct time-shifted services like DVR and VOD(†), the number of weekly hours US young persons ages 18-24 spend watching TV has decreased across all quarters from a level of 23-26 hours in 2011 to a level of 15-18 hours in 2015, and further to 14-16 hours in 2016 (excluding Q4). In addition, when comparing between age groups, it can be seen that the 12-17 years (teenagers) and 18-24 years age groups are most similar to each other in the number of their TV watching hour(decreasing between Q1/2011 and  Q3/2016) and are now even closer to each other than five years ago. There is a decline in number of weekly TV watching hours also in the 25-34 age group, and though more modest a decline, also among those ages 35-49, but there is no discernible trend in age group 35-64 and even a small increase among seniors 65 years old and above (based on data from Nielsen, visualised by MarketingCharts.com). Note that the band of weekly hours mounts as the age rises. Another chart summarises those differences more sharply: the number of hours spent watching TV per week decreased in the younger age groups (12-17 & 18-24) by 37%-40% in five years, 28% still in age group 25-34, and only ~11% among ages 35-49 (weekly hours increased 7% among 65+).

  • Note: The original figures by Nielsen indicate that most traditional TV viewing time is still ‘live’ or linear, accounting for 85%-90% of time, and the rest goes to viewing programmes by DVR or VOD (figures of BARB for the UK indicate a similar ratio).
  • † Clarification: ‘Live’ TV includes of course live programmes or events that are taking place and filmed as they are broadcast or transmitted, but ‘live’ refers here more generally to programmes that are viewed at the time scheduled by a TV company for broadcasting, to be distinguised from programmes watched at a time chosen by a viewer. One possible development is that the concept of VOD will be expanded dramatically.
  • Statistics about streaming usage are still difficult to obtain. Figures brought by MarketingCharts from a less familiar source (‘SSRS’ online and mobile survey company) suggest that the number of hours Millennials spend weekly watching streamed content through various modes increased gradually and almost continuously in 2013-2015, though the overall level is still modest (~1.5 hours in 2013, rising up from 3.3 to  4.5 hours during 2014 until standing on a plateau of 5.5-5.7 hours in 2015).

Research of the British Broadcasters’ Audience Research Board (BARB) notably shows that, other than the TV screen, personal computers (desktop/laptop) and tablets are the  more frequently used for watching TV content on their screens, usually in the evening, while smartphones remain much less popular — smartphones are probably less accepted for TV viewing because their screens are too small to enjoy the images and are not convenient to watch for an extended time. Furthermore, with no evidence showing otherwise, it seems a greater part of time spent viewing not on a TV screen in the UK is still done at home (BARB’s Annual Viewing Report, April 2016, pp. 10-11).

The more traditional TV networks and service providers (cable and satellite) have to acknowledge that the rules of the game in the TV domain have changed: “As both traditional service providers and streaming services alike are looking to engage viewing audiences and hold on to subscribers, catering to the individual needs of each viewer is increasingly paramount” (CSG International: Insights Blog, see their infographic of global content viewing trends). Indeed we can see that TV networks and service providers try to adapt at different levels of extent and pace to changes in the competitive environment and shifts thereof in viewing patterns of consumers. Networks are getting more deeply into the Internet space, availing at least some of their content to viewers by streaming on their websites or through mobile apps, and even greater programming content may be offered to customers by subscription (e.g., BBC iPlayer). Especially in the area of news, we see news websites inserting more video content into their reports, including live coverage. The cable and satellite service providers are working to enhance their channels and VOD libraries to bring content that viewers may be seeking by streaming (e.g., HBO) and thus dissuade customers from churning to other services.

The media industry, most broadly speaking, sees a lot of movement in recent years. It seems that media companies, mainly the larger corporations, are trying to get into each other’s territory — TV (broadcast, streaming), digital media content (Internet & mobile), telecom infrastructure, TV and cinema production, etc. The new business and technology mixtures are created through mergers and acquisitions, accompanied by integration of different functions (horizontal and vertical) that will enable companies greater capabilities along the wider spectrum of the production and transmission of video content to consumers. Notably, there is emphasis on delivery of digital content through various platforms in combined modes (e.g., text, still images, video and audio). Content characteristic of TV programmes is just part of the media ‘basket’ companies are planning to offer their customers. A further implication is that content of different domains in Internet and TV formats will be increasingly blended on the same screen — from news information and education to entertainment and shopping.

In a highly remarkable merger in sight, AT&T is planned to acquire Time Warner for $85 billion. The deal between the parties is already agreed, but approval by the American antitrust authority is still in question (peculiarly, a political matter is also involved because of the bitter dispute between President Trump and CNN owned by Time Warner). This merger would combine the competencies of Time Warner mainly in content (including production and broadcasting) with the telecommunication infrastructure and services of AT&T in Internet and wireless (‘mobile’) communication. It should allow the integrated corporation to reach a wider audience with a richer and greatly varied content on screens of TV sets, personal computers and mobile devices.

Time Warner holds a broad and impressive portfolio of TV channels, production units and digital services for delivering their content. The most famous brand is probably CNN which includes its American and International channels. But Time Warner also owns HBO for TV programmes and Cinemax for cinema films, both available to subscribers by streaming. In fact, Time Warner also owned in the past the AOL Internet company. In 2015 AOL moved hands to Verizon telecom company, and just within months Verizon also acquired the troubled Internet company Yahoo. The expansion of Verizon is yet another example of an integration of telecom infrastructure and services with digital  content capabilities, but it does not have yet a strong TV presence.

  • Time Warner spun off its print arm of magazines in 2014, identified now as the independent company Time Inc.. Some of its better known magazine brands include the Time magazine of current affairs and Fortune magazine of business affairs, but overall the company publishes magazines in various areas of interest (e.g., entertainment, fashion & beauty, photography, home and design, as well as politics, business and technology).

The TV business is reshaping. Frahad Manjoo of the New-York Times (October 2016 [1]) foresees a future of TV “built on lots of bold, possibly speculative experiments”. Advanced digital technology companies (information, Internet & mobile) of the kind of Google, Amazon, Facebook and Netflix may readily disrupt efforts of the large telecom and “old-guard” media companies. When TV viewing habits also are fluctuating and reforming, business decisions involve much “educated guessing”.  In another article, Barnes and Steel [2] consider repercussions of the AT&T-Time Warner deal on other media and telecom companies. While some of those companies declare their objection and intent to fight the merger, they may follow a similar trail.  The cases of four companies are reviewed:

  1. The Walt Disney Company insists on its market position as a predator and not as a prey to technology companies. Its current objective is to bring more premium TV channels directly to consumers by streaming; that may entail the purchase of desired brands (e.g., Pixar, Marvel, ESPN).
  2. Comcast, a telecom company (cable [TV] and broadband), is also the owner of TV networks or channels  (e.g., NBC and MSNBC), as well as film and TV studios. It may not sit idle and may try to take over another telecom company to complement its coverage (e.g., extending to wireless).
  3. 21st Century Fox (cable TV, films) is claiming to have no plans of expansion and entering into new areas. It previously failed to acquire Time Warner (2014). But the recent AT&T-Time Warner deal may change their plans. (The Murdoch family is currently aiming to take full control of UK-based Sky satellite TV).
  4. CBS and Viacom engage together in TV broadcasting, a cable TV service, and TV and cinema productions. The controlling owner (Redstone family) may now be encouraged to unite the sister companies (once again) into a single corporation.

We should not rush to assume that watching TV programmes on a TV set or watching programmes in real-time are about to end anytime soon. Traditional live TV viewing and digital video viewing are complementary, possibly preferred on different devices at different times and in differing circumstances (eMarketer, 14 March 2016).

There may be personal but also social benefits or incentives to watching programmes or films in the ‘old-fashioned’ way. First, enjoyment and visual comfort, particularly for certain types of video content, are expected to be greater when viewed on a large screen (37” and above). Second, there is real value in watching a programme such as an episode of a popular TV series at the same time with others so that one can share impressions and discuss it with acquaintances the next day or right after the show. A similar argument can be made for watching live a sports contest, on top of the thrill of watching the event as it unfolds. Third, there is still pleasure and enjoyment in watching TV together with family or friends on a large TV set at one’s home (and in some cases in a pub or bar).

The new technological developments in distributing and displaying video content in high quality, offer opportunities for consumers to improve and enrich in several ways their experience of viewing TV programing and other types of video content. Consumers would be given more freedom of choice and flexibility to watch TV as they truly like. Companies in the wide spectrum of media, telecom and Internet may also find new business possibilities to enhance their services to customers, including in particular TV-like content. But it will take more time to see how the TV domain shapes-up.

Ron Ventura, Ph.D. (Marketing)

Notes:

In New-York Times (International Edition), 26 October 2016:

[1]  “A Risky Bid With the TV Industry Up for Grabs”, Farhad Manjoo,

[2] “A Chilly Reaction to AT&T Deal”, Brooks Barnes and Emily Steel

 

 

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Looking over thirty years back, it is quite fascinating to reflect how our customs of viewing films at home have shifted during that period: We started in the early 80s with rental of videotapes at local library stores to be played on our good-old VCR; next, we explored the variety of films offered on multiple movie channels of cable and satellite TV networks; then moved in the 90s from videotape to DVD rental; later-on discovered the convenience of vide0-on-demand (VOD) services launched by our cable and satellite TV providers; and more recently we may have started to select and stream films online via the broadband Internet. Some changes to go through in just three decades! Even when excluding options that involve the acquisition of film copies (e.g., on DVD), much activity in this field is apparent. And all that has come evidently at the expense of cinema theatres whose numbers in city centers have diminished significantly, and urban social life has changed with it.

An important and interesting player in the field of film viewing at home is Netflix Inc. (www.netflix.com). The company started in 1997 in the US with an exceptional rental service of films — order online, receive and return a DVD by mail. Yet in 2007 Netflix moved into the domain of video streaming and it is now a growing part of its business. An early move by Netflix has gained it advantages that other Internet companies try to challenge.

Last December the Fortune Magazine selected Reed Hastings, founder and CEO of Netflix, as Businessperson of the Year 2010  (1). He arrived first ahead of fifty nominees rank-ordered by Fortune. The selection was based on reader’s choice, financial-based metrics (e.g., stock performance, revenue growth, and profit growth), and additional off-the-book factors related to marketing and managerial leadership and style. Hastings scored first on stock performance (during 2010 Netflix share price more than tripled on NASDAQ from $50 to ~$175 climbing at a steady rate) and ranked third in reader’s choice.

Four main reasons emerge from the story on Hastings and Netflix that seem to explain better how he became deserving of the award:

Hastings had a foresight already in the early 2000s that DVDs and the service concept of rental are going to lose favour with consumers and therefore decay before too long. Consumers would want access to films that is much more convenient, fast and direct. Led by this vision, he has been willing to take risks exploring, developing and testing different types of solutions for delivering film videos to consumers at their homes that rely on Internet broadband technology. Significantly, Hastings did not let himself get locked on a solution just because the company has spent that much resources on developing a prototype if he eventually realized it was not the right approach after all. For instance, Netflix developed a branded device of a hard drive type to which consumers would be able to gradually (i.e., rather slowly) download a whole film and watch later. But YouTube that went on air in 2005 quickly convinced him that the hard drive approach is obsolete and that the solution should be in the realm of live streaming, so he dropped the hard-drive concept and changed course. Netflix did not come first with streaming and was inspired by YouTube but it still had to find a way to efficiently stream full feature films. Later on Hastings was also dissatisfied with another branded device, realizing that his customers should not be burdened with proprietary hardware from Netflix. Instead, its current solution is in software applications, giving customers flexibility to stream films to a variety of devices (e.g., computers, TVs, tablets, smartphones). In an interview to Fortune Hastings said with regard to his decision to give up Netflix-branded device: “But if you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy” (p. 54).

Furthermore, Hastings did not refrain from introducing the new mode of content delivery simultaneously with the incumbent rental of DVDs by mail even though the new service could hurt or ‘cannibalize’ business from the existing one. Companies who plan to introduce a new product are often cautioned of cannibalizing a product they already offer to fulfill a similar purpose or function for the consumers. Accordingly, many companies that look to expand their product lines test carefully the sources of demand for the new introduction. Managers that become attached to a successful product they previously helped bring about are reluctant to do something that may help “killing it”. Watching out of cannibalization is in place when the company aims to increase variety of models to different consumers’ tastes or merely prove it is not freezing. However, cannibalization can be justified as in the case of Netflix when Hastings projected that the days of DVD rental where in any case numbered. Then progressing a transition proactively, letting the new solution grow at the expense of the old is the more appropriate course of action.

  • The customer base of Netflix has started to expand impressively in 2005, growing from 5 million subscribers to nearly 10 millions by the end of 2008, and is estimated in the end of 2010 at 20 million subscribers.
  • Unfortunately the chart of Fortune does not show how the ratio of subscribers between “renters” to “streamers” changes, but they do report that in the 3rd quarter of 2010 66% of customers used streaming for at least 15 minutes compared with 55% at the beginning of the year and only 37% in mid-2009.

 Netflix was looking for ways to improve on its film recommendation system to its customers. Being able to customize film offers that better fit customers’ preferences based on existing customer knowledge has become a core competence requisite, making search for relevant films by customers easier and more pleasurable. Rather than investing all the effort in-house or outsourcing it to some expert BI company, Hastings took a brave initiative and announced in 2009 a competition, the Netflix Prize of 1 million dollars. Talented engineers, computer scientists, statisticians etc., organized in teams, joined the challenge to develop a new enhanced model of personalized film recommendations. The full story of the competition is beyond the scope of this post; in view of the positive way it worked out it may be concluded that Hastings allowed talented professionals from around the world participate in an important enterprise of Netflix, with opportunities to enhance their careers and win a hefty prize, and in return received a powerful sophisticated model that would improve the service performance of Netflix. There is also reason to expect the competition story added value to the brand (e.g., a story in Fortune).

  • Two points are interesting noting about the model of the winning team (BellKor). The model conceptualized a map of film titles grouped in “regions” where titles in a region may share in common a genre, actors, or specific aspects of content and style.
  • First, the spatial spread of film titles is based on data of customer characteristics, films they viewed and ratings assigned, if any. As such, the inclusion of titles in the same region may not be immediately interpretable based on some objective classification of genres but reflects similarities between films as perceived by the customers.
  • Second, distances between any two titles can matter. Thus, while a film title is likely to match better with another title in the same region than from other regions, if the first film is close to a border it may make a better match with a second film just across the border in a neighbouring region than with a third film that is located in the same region but farther on the other end. 

A fourth factor that may have helped Hastings to succeed with Netflix can be associated with his own character and style of management. Apparently, in a pervious company he founded and managed he has been recognized as a very aggressive boss, impatient and somewhat erratic. It earned him the nickname ‘animal’, courtesy of one his senior managers, McCord, who admits that at first he was reluctant to rejoin Hastings at Netflix. Hastings said to Fortune that one of the problems was he never spent time to build a distinct culture to his previous software company. At Netflix he is reportedly more attentive to other people, willing to listen to their ideas in brainstorming even if he does not agree , and cares more about the development of high-esteemed professional culture that relies on trust in the integrity and commitment of employees (it is a “no perks” company according to McCord, all their fun is from building products).

This is definitely not all of the story of success of Netflix. Probably more contributing factors may be suggested, and there also are challenges that Netflix will have to confront in the near future to maintain its strengths in the market. Notably, streaming applies not only to feature films but also to a wide variety of TV programme series.

In the past three years Netflix was smart and quick to secure agreements for rights to stream content, particularly new films, with leading production studios such as Paramount, Lion Gate and MGM (in consortium via their joint venture Epix). Competition on rights with studios as well as TV networks (e.g., ABC, CBS, HBO) promises to be a hot topic for the foreseeable future in this field. Just in December Netflix signed with ABC. Amazon is already showing interest in offering streaming to its subscribers and is seeking attractive agreements. Netflix is also likely to face resistance from cable and satellite TV networks who feel threatened by their activity. Limitations in availability of films and programmes for streaming will curtail its advantage to customers vis-a-vis rentals and could also reduce the effectiveness of recommendations of content for access by streaming.   

 There is likely to be a continued quest for capacity to stream ever-increasing amounts of video data via the broadband Internet. It is estimated that Netflix already captures 20% of all broadband downstream traffic during peak hours in the US. If indeed consumers look at streaming as the preferred way to access and watch films and TV programmes in coming years, the contest will be more intense. Internet Service Providers already seem to make their own considerations, possibly charging their own customers by volume downstream (as already done with respect to mobile devices). So while Netflix may charge $7.99 monthly on a stream-as-you-can basis, subscribers may be required to pay an additional fee to their ISPs  (2).

On a final bright note, streaming can open new opportunities for Netflix to extend its business outside the US and Canada (started just in 2010). Less constrained by the logistics of rental by mail, it may obtain access to broadband channels to stream film and TV content to customers in more countries, perhaps first in Europe and then in other regions.

Ron Ventura, Ph.D. (Marketing)   

 (1) Reed Hasting: Leader of the Pack, Michael V. Copeland, 2010, Fortune, Europe Edition, Vol. 162, No. 9, December 6, pp. 49-56

(2)  Netflix on a roll as streaming catches on, FT.com, 28 January 2011

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