Netflix and Content Aggregation

I think what Netflix did was genius, except for the hurried name, and the de-linking of playlists.  If they had called it Netflix DVD and Netflix Instant and then had Netflix recommendations, library, and playlist it would have been perfect.

They solved the HUGE chicken and egg problem: no content provider wants to provide content if you don’t have millions of customers- and- you can’t get millions of customers unless you have content.  If the newspapers had somebody like this they would be charging for content instead of giving it away for free.  Hollywood should be grateful.

Now content providers never want to be aggregated, they always want to pay by the drink.  This is totally wrong let’s look at the Cable TV and Newspaper Industries.  The price of newspapers online is essentially free.  Yes the Wall Street Journal charges but you can look at the summaries, find and interesting article and Google it, and I have enough different browsers so the NYT firewall is never an issue.  Now let’s look at the CableTV industry.  ESPN gets $4.69 a month from EVERY SINGLE cable subscriber.  How many tens of millions of people do you think would choose not to pay that, but can’t because they want Cable TV and that’s what is comes with?

If Newspapers only sold to several aggregators and the only way I could get my news from any reputable source was to choose a service I would pay.  It’s great to say I’m going to control my content!  People will pay me a la carte.  The only way this works is if there are no competitors.  If there are one will decide to dirt scratch and low-ball price, because the marginal cost is zero.  The race to free begins.  People will accept an inferior product if it’s free, which brings me to Netflix because the streaming content definitely is inferior, but look at what they’ve done.

1. Get a huge customer base addicted to streaming (I would have serious marital problems if I stopped that service) by giving it away for free.

2. Position the “price increase” as you have to pay more if you want to get DVD’s.  Hogwash.  Basically what they did is say: streaming is no longer free.  That’s a seriously hard proposition.  It’s really hard to get people to pay more, it’s almost impossible to go from free to even one penny.  He did it by throwing the DVD business under the bus.

3. Separate the two and “apologize”  I’m not sure if he had this all planned but if he did he is a super genius, however he could have done a better at executing this.

4. Yes customers HATE this.  What do they hate?  Do they hate the service?  No!!  They hate that they have to pay more.  Do you think anybody likes $4/gal gas?  They still buy it. He basically went from 20M people paying zero to 20M people paying $8/month, that is damn near impossible and he pulled it off.

For him to keep streaming viable and that is the future, he is going to have to be able to go to the content holders and say: Do you want to share in this piss-pot of money I have here or not?  Here is $100M to your bottom line this year at $.50 a subscriber.  If you can’t show a piss-pot of money the rights holders are going to want to charge on a per unit basis and we went over why that is a bad long term strategy

So Netflix can go to content providers and say: “I will give you a share $.50 a subscriber which is $100M right to your bottom line.  It’s not a meaningless number, which it would be if you didn’t have 20M paying customers.  Look it can’t be $5 a month.  See how pissed people are at $8?  We’ll raise the price once we have them locked in with great content.  They set a price.  You’re going to try and build your own site??  Good luck.  See how that worked for the Newspapers?  No, it’s much better for all that are only a few places decent streaming.  No different than CableTV.  Start putting it on the internet and all people are willing to pay for it is free.”

As a SWAG I think right now they are saying: look we’ll give you a fifty-fifty split: content providers combined get $4; I get $4 of my $4 I give the Content Delivery Network’s (CDN’s) $2.  When they had everything combined the story wasn’t so easy, I want a piece of the DVD business as well.
Now is the price going to change??  You bet.  But it is harder to go from free to $8 a month than it is over the long term to go from $8 a month to $80.  I give you cell phones and  CableTV to illustrate, the hard part is getting somebody to start, stopping is very hard.  An issue is going to be the economics of all you can drink bandwidth, which I addressed in what they have to pay CDN’s .  There is real marginal cost there.  If people leave it on all day like TV there is real marginal cost.  Once the capacity gets used up from the great build-out of 1999-2000 (go to any Level3 datacenter and see how it looks like a neutron bomb hit it) there will be need for some large investments.  There is none for the content, and that is why if it’s a la carte the price will go to zero.

  • Aaron Klein

    I hope you are right and you’re beginning to convince me that the customer base may be a big enough moat to force the studios and networks into line.

    It’s certainly true that it won’t work for each studio or network to do distribution on their own and Netflix does have a great argument to make: we’re a better partner than Amazon or Google because we’re not trying to use your product as a loss leader.