Netflix and TV 2.0

This week, Net­flix took a large step in redefin­ing tele­vi­sion for the future by going back into the pro­duc­tion busi­ness.

Some back­ground

While many have been sur­prised by the move, this is not the first time that Net­flix has gone into the con­tent pro­duc­tion busi­ness. A few years back, the com­pany launched Red Enve­lope Enter­tain­ment, a com­pany that worked as the pro­duc­tion arm of Net­flix, buy­ing por­tions of indie movies. While their bud­get at the begin­ning of the cen­tury was small, by the time Red Enve­lope Enter­tain­ment was closed (in 2008), the com­pany was spend­ing $100 mil­lion on help­ing pro­duce and dis­trib­ute movies (IMDB showed them to have dis­trib­uted 41 movies and pro­duced 12). The rea­son for its clos­ing was a worry about con­flicts that would make it harder for Net­flix to acquire con­tent and a gen­eral worry that annoy­ing the stu­dios might not make good busi­ness sense.

But while the com­pany had shut­tered its pro­duc­tion com­pany, its inter­est in get­ting more con­tent for its cus­tomers did not wane. And as it has grown larger, the stu­dios have found them­selves annoyed by Netflix’s rise. What changed rad­i­cally in the rela­tion­ship is that Net­flix now has 20 mil­lion cus­tomers it can rely on, and the stu­dios are not will­ing to give Net­flix their best con­tent at any price.

So since the TV and movie indus­try won’t give Net­flix access to high qual­ity con­tent for its stream­ing offer­ing, the com­pany has fig­ured that it would com­pete one step ear­lier in the process, by buy­ing a stake in the pro­duc­tion of content.

We’ve seen this before

The sce­nario of Net­flix vs. Hol­ly­wood is noth­ing really new. In fact, it seems to be at the core of every suc­cess­ful com­pany cre­ations on the internet:

1. a new inter­net com­pany finds a more effi­cient way to do something.
2. Incum­bents call it a side mar­ket while the com­pany is still small and gen­er­ally ignore the changes.
3. The new inter­net com­pany syphons increas­ing parts of the over­all pie.
4. Incum­bents take notice of the new inter­net com­pany and cry foul.
5. Incum­bents start dying off as a result of the realignment.
6. The new inter­net com­pany makes rev­enue that rep­re­sent roughly 10–20% of what the indus­try used to make as a whole.

You can apply the tem­plate above to the music indus­try (iTunes), the news­pa­per indus­try (craigslist), the adver­tis­ing indus­try (Google), etc… Net­flix is prob­a­bly going to do the same to the video indus­try (and by video, I mean a lot of the pre-recorded video con­tent avail­able, whether it is movies or TV).

8 words that will change TV forever

In the more recent cases, it appears that the inef­fi­cien­cies were due to lack of data. And Net­flix, like many of the new con­tenders before it is using its troves of data as a com­pet­i­tive advan­tage. Lost in the flurry of com­men­tary about the announce­ment were 8 small words which may hold the key to Netflix’s approach to con­tent acqui­si­tion (empha­sis is mine):

We’ve com­mit­ted to at least 26 episodes of the seri­al­ized drama, which is based on a BBC mini-series from the 1990s that’s been a favorite of Net­flix mem­bers.

Every time mem­bers watch a movie, Net­flix gets some data as to whether they watched it fully and often times, Net­flix mem­bers rate the movies, declar­ing their inter­ests and pref­er­ences along the way. On an indi­vid­ual basis, the data is used to tai­lor rec­om­men­da­tions of other movies a sub­scriber may be inter­ested in. In the aggre­gate, how­ever, it give Net­flix a clear advan­tage in that it knows exactly what its mem­ber­ship is inter­ested in. By com­par­i­son, TV chan­nels like HBO and Show­time may be able to do focus group and look at rat­ings data to get an approx­i­ma­tion of the taste of their respec­tive mem­ber­ship but they do not know their sub­scribers on as inti­mate a level.

In his recent report on the state of web 2.0 and the app econ­omy, John Bat­telle had doubt about the suc­cess of “data as the new Intel Inside” but here’s another exam­ple of a provider har­ness­ing the col­lec­tive intel­li­gence of its user base to get data as to what may or may not inter­est them in the future.

Imag­ine the kind of bid­ding war that goes on around juicy pieces of con­tent. Up until recently, the play­ers would guess as to what may or may now work. How­ever, they were work­ing with imper­fect data. Now Net­flix can almost tell which of its sub­scribers will be most inter­ested in a show before the show is even pro­duced because that sub­scriber has pro­vided infor­ma­tion on what inter­est them in a vari­ety of ways: from what shows/movies he/she has watched online (and here there is data as to when/where he/she stopped, restarted or how long they actu­ally watched) to how quickly they turned around a rental, to actual grad­ing if the sub­scriber decides to do so. All that data may help Net­flix under­stand which shows/movies are going to be suc­cess­ful with its mem­ber­ship in the future.

With that knowl­edge, Net­flix can then bid on mate­r­ial that works for its mem­ber­ship. To its com­peti­tors, this might be unnerv­ing as Netflix’s abil­ity to pro­gram for its audi­ence will be much more on-target than any­one else’s due to some strong data.

Death of primetime

Prob­a­bly more unnerv­ing to the TV indus­try in Netflix’s entry in their busi­ness is the fun­da­men­tal realign­ment of how peo­ple will con­sume con­tent. Since the inven­tion of tele­vi­sion, TV has mostly been based on an event-driven model. Up until a decade ago, peo­ple were still talk­ing about appoint­ment TV, where view­ers would make time in their sched­ule to watch a show at a time defined by the TV pro­gram­mers. The time was designed to draw the largest audi­ence pos­si­ble so that the show could be seen as a “hit” and be the “talk of the water­cooler” the next day.

Some may argue that DVRs have destroyed that model but I would ven­ture that they have only eroded it. After all, most peo­ple still want to see this week’s (or recent weeks’) episode of a pop­u­lar TV series. This is why TV com­pa­nies have been OK with pro­vid­ing older sea­sons of a TV series to Net­flix but have jeal­ously kept the more recent one under wrap or offered them online in a way that would return max­i­mum rev­enue to them in the short term.

But Net­flix bid­ding on con­tent is explod­ing that con­cept. By throw­ing sev­eral episodes of a new “exclu­sive series” online at the same time, they are indulging their mem­ber­ship, while at the same time destroy­ing the idea of a par­tic­u­lar time/day when one needs to sit in front of the TV set to see a show. I am sure that they will cre­ate win­dows of release (the first X episodes are com­ing on this date) in order to max­i­mize mar­ket­ing bang but once they are pub­lished, the episodes will be avail­able for a longer duration.

By get­ting peo­ple acquainted with this model, Net­flix is going to make ALL its cur­rently pur­chased con­tent that much more valu­able because it’s erod­ing the idea of “most recent” and trans­fer­ring it to “avail­able or not”. This means ser­ial series they now own become more evergreen.

The Net­flix Channel

Last year, I argued that Net­flix was headed to be chan­nel 1. With this recent move, I’d war­rant that Net­flix is going fur­ther: for­get being a chan­nel, let’s be the whole TV experience.

… and that is what every TV pro­gram­mer out there should be. For a long time, my friend Jeff Jarvis has been talk­ing about explod­ing TV. Well, Net­flix has been found sit­ting by the dyna­mite with a set of matches.