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.

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6 Comments. Leave new

  • Great article. God I hope this works, then you will see other tech companies like say….Facebook create a channel with original content and integrate it inside their kingdom. The ultimate problem down the line is the internet service providers chocking off bandwidth (AT&T and Comcast) or charging “up the ***” for streaming content.

    • Don’t fool yourself, even if Netflix or Facebook end up winning this battle, prices will probably rise back if we get into a monopoly-like situation again… The challenge is getting a market that is broad enough that several players can get some level of dominance so each major player keeps the others in check….

  • Adrian Sexton
    March 21, 2011 5:53 am

    Tristan, excellent article. One question: as it’s not game over for any of the players, what do studio/content owners do proactively, instead of just crying foul and trying to choke off A-list content rights?

    • The first thing is probably to realize that release windows are a synthetic creation and start releasing content in all media forms simultaneously. Then work on auctions between the players to get access to the different rights available (theater, TV, VOD, etc…)

      That might be a start and, to date, only magnolia pictures has experimented with models along those lines (no surprising though as Marc Cuban is their main backer).

  • Entertainment preferences are very difficult to predict, even with refined data, since every entertainment product is different (look at the variation among police dramas for instance.) If the data on preferences were even semi-accurate, then why do 9 out of every ten shows fail? Networks have always swam in data, quantitative and qualitative and test marketed products before release, to no avail. Most networks – even the big three cable networks – also have demographic targets so they’re not programming to the mass audiences but niches. Netflix going after such general content seems like it could suffer the harm that has befallen the big three – trying shows that appeal to everyone (their subscriber base) and appeal to no one (versus cable’s segmentation.)

    Nice to read the Jarvis stuff from 2005. Yes, TV will explore any minute now….

    • Warren,

      I suspect there is a huge difference in knowing about the audience and knowing about the content that resonates with the audience. To date, quantitative and qualitative data in media has focused on the product as a whole against a test audience or on the audience as a whole against a marketed product. Where Netflix differs is that it has a good sense about its own audience and how it reacts to ANY product that the audience has tried. The ratings algorithm they have developed is almost scary in the way it can predict how likely one is to like something based on some cursory training. As the algorithm learns more and more about the subscribers, its recommendations get increasingly accurate.

      I suspect THAT is the huge difference and competitive advantage of the data Netflix has access to. Imagine if VH1 could track second by second what every single one of its viewer was watching, have them rate the program after they watched it and declare what programs they would like to watch next. Imagine how different your programming might become. It would give the channel a level of initimacy that hasn’t been offered yet and I suspect that’s what Netflix is going to go after.