The studios will lose the "war" with Netflix

NetflixThe first rule of Media 2.0 is that you ignore consumers at your own peril. The people formerly known as the audience are now fully in charge, as Rishad Tobbaccowala noted in 2004:

We’ve entered an era in which consumers are God, because technology allows them to be godlike. How will you engage God?

This strikes at the heart of all that is disrupting media, for legacy media has a history of ignoring consumers in the name of revenue growth. It’s a blind spot that threatens everything today and will continue to do so.

  • People don’t see banners and yet we throw more banners in their faces.
  • People will tolerate 7-12 seconds on a preroll, yet we give them thirtys.
  • People use DVRs to escape the time waste of commercials. We add MORE commercials.
  • People hate disruptions to “their” content, but we create interstitials and pop-ups of all kinds (note: people don’t “see” these either).
  • People don’t want to pay for cable bundles they don’t use, but we up the rates for those anyway.
  • People want what they want when the want it, and here’s the kicker, they’ll get it, too.
  • Those who tap this discontent will win in the battle for consumer eyeballs currently underway.

Jeff BewkesWitness the odd case of Time Warner CEO Jeff Bewkes and Netflix. In future times, this will be a textbook study of how those in power missed it at the dawn of the 21st Century, and the bizarre thing to me is that there must be people at Time Warner who see what’s happening.

A little background. Hollywood thinks it controls quality entertainment content just like it always has. This illusion feeds the monopoly known as the copyright cartel and gives them both the courage and the arrogance to behave as though nothing is changing. They own the content, by God, and they’ll do what they please with it. Consumers? What choice do they have?

Netflix has brilliantly skirted the wishes of Hollywood since its inception. When studios wouldn’t license DVDs to Netflix, the company simply bought them retail and launched its highly consumer-friendly business. Then in what Hollywood views as a strategic blunder, Starz leased its movie library to Netflix for the paltry sum of $25 million, and Netflix began its streaming service.

Hollywood hates Netflix, because it doesn’t play by their rules. When Bewkes told the New York Times that Netflix was “…a little bit like, is the Albanian army going to take over the world? I don’t think so,” he was declaring a war that he cannot win. Why? Because consumers are in charge. Mr. Bewkes will live to regret such a haughty dismissal of a rapidly growing power in video distribution, because Hollywood no longer has total control over the ability to make and distribute a film. The movie hegemony is filled with middlemen, and a hyperconnected universe abhors middlemen and routes around them. We’re on the cusp of a major film-making revolution, and Netflix is positioned as the disruptor.

David Pakman, courtesy TechCrunch TVVenture capitalist David Pakman of Venrock is just one of many observers who think Bewkes is mistaken. He told TechCrunch TV that we’ve been here before.

We saw this with the music industry. They were seeing CD sales decline, lamenting piracy and along comes Apple and launches this incredibly simple, wonderful experience for buying downloads. Sales take off, and what’s the first thing the music industry does? They complain. This is terrible. Apple’s not charging enough money for the music. They’re underselling our price points even though we agreed to let them sell it at this price. We need to raise prices. Apple’s going to destroy the industry.

Meanwhile Apple’s not destroying the industry; it’s just helping it along and providing an important revenue stream. Apple went from nothing to becoming the world’s largest retailer of music in just a few years.

Now here we go again with digital video. Netflix…has delighted consumers. They’ve built a business of 15 million subscribers. They’re almost as large as the largest cable company…60% of their subscribers become streamers within a year…and what does Jeff Bewkes say? This is terrible. They’re underselling our content. We’re going to raise prices on Netflix.

Pakman and many others won’t invest in start-ups that require any form of license from traditional media, because those in media “don’t think rationally” about their products. That’s because they’re much too busy trying to protect the old model. It’s the innovator’s dilemma.

Jeff Bewkes underestimates the power of consumers, 15 million of whom make up the Netflix subscriber base. Watch that to grow to 25 million within the next couple of years.

The lessons for local media are many, beginning with admitting, once again, that consumers are in charge. We also need to learn the lesson that Netflix is teaching us about digital video — that people want it when, how and where they want it. This speaks to one of our favorite topics: on-demand, unbundled distribution. It also speaks volumes about how people will pay for a wonderful service. It may not be as much as we’d like up front, but give it time. Besides, what we lack in fees, we can overcome with numbers, and this speaks to the evolving meaning of the word “local.” Local used to mean proximity, but it can now include people far away who have local ties. Why should a car dealer in Huntsville, Alabama, for example, care about anybody in Dallas, Texas? Because if that person has children in Huntsville, they will influence the car buying choices of their offspring. Data allows such targeting, and that’s where we’re headed.

The digital world is not the enemy of traditional media, and that’s the biggest lesson in the Time Warner/Netflix “war.” We need to overcome much to see that, and we need courage then to act on it. We either do that today, or we’ll be forced into it downstream.

Comments

  1. invitedmedia says:

    “why should a car dealer in huntsville care about anyone in dallas?”

    replace huntsville with boise and dallas with detroit and you’d have the makings of a heated “discussion” i had with a ktvb’r back in 2005, the guy still won’t speak to me.

  2. Sadly you miss Bewkes’ point completely. Netflix doesn’t DO anything! They ride other peoples’ coattails. By that I mean they take other peoples’ content and use other peoples’ pipes.

    He’s not downplaying digital distribution, he’s not buying that Netflix is the answer. Time Warner isn’t in the business of underwriting other companies. If they get significantly more from other distribution models, why risk those for something that isn’t viable like Netflix. Again the point of using others bandwidth that will need to get upgraded if Netflix becomes more widespread.

    Netflix can’t continue the $8 price point. It’s simple math. They can afford it. I can’t wait to see your post criticizing them them when they have to increase their rates to $20-$25 to support their license fees.

    With that said, cable can’t continue down the path they’re on either. I think you’ll see Netflix have to charge a lot more, but the cable/satellite guys start charging a lot less.

  3. “The first rule of Media 2.0 is that you ignore consumers at your own peril. ”

    That is the first rule of any business, ignore consumers at your own peril. The monopoly mindset you see in the last mile providers, TV studios, Record labels, and TV stations is, “we are going to take our marble and go home if you don’t let us do what we want”.

    The huge problem with that mindset is there are other sources and competition from new products and people competing in the same space. People have a limited amount of time between work, kids, school, etc and it is getting divided between these new products, and competition.

    As an example of what is to come, in the video distribution and creation industry, lets look at the record labels. At one point the record labels were the only game in town for distribution and promotion. We now have the internet which allows for both. The labels controlled the number of bands widely available to the public (around 5,000 at any given time), now there are 5 million bands on MySpace alone. There used to be just TV, the land line phone, movie theater, and the radio-record player. The new sources of competition are social networking, gaming, texting, cellphone, web browsing, online video, streaming music, online music, blogging, e-mail, collaborative programming and other projects, etc. There was a shift from albums to singles because people only wanted the songs they wanted and not the filler no one listened to. The labels had wear and tear sales where records, tapes, CD’s degraded or broke, and digital doesn’t wear or break. The labels had upgrade sales due to format changes, record, 8 track, cassette, CD, mp3, and digital is the final format.

    All of these things will be happening on the Video side of content also. TV Studios profit margins will be substantially reduced due to competition from web only based shows like Pioneer One. No one will want DVD’s or blu-ray because hard drives will have gotten to the 50 Tbyte range in 4-5 years, it will all be digitally stored. More competition from online will occur in the form of new methods of communicating and collaborating. In the next 10 years you will begin seeing the studios that do not adapt begin failing in the same way that the labels have.

  4. To “CD”: For a company that “doesn’t do anything”, Netflix does quite a lot:

    * It took Blockbuster, once the most powerful video distribution company on the planet, to bankruptcy.

    * It got its client software for viewing its streaming content built into just about every Internet-connected DVD player, HDTV and over-the-top set-top box sold in the U.S., as well as available for download for Microsoft Xbox 360s, Nintendo Wiis, and just about every personal computer, smartphone and tablet.

    * It built the most efficient system for distributing and processing physical media ever implemented.

    In fact, if you look at the actual amount of content that Netflix has available, it makes Time Warner look like the Albanian Army. Netflix has the rights to stream more movies than HBO (and HBO, incidentally, is bleeding subscribers.)

    Mr. Bewkes is angry about one, and only one thing: He doesn’t think that Netflix pays his company enough money. Period. However, throwing temper tantrums at industry conferences and in interviews with the New York Times isn’t a very effective negotiating tactic, especially if it casts doubts on your management abilities and grasp on reality.

  5. Philip J Robar says:

    CD,

    > “Netflix…use[s] other peoples’ pipes

    This is the usual nonsense that Cable and wireless execs like to spew, hoping that most people won’t notice that it is nonsense. Netflix pays its suppliers for their content, Netflix pays for its internet connection, Netflix’s internet provider has an agreement with other providers, and I pay my ISP for my internet connection. No one is using anything for free. If the internet cable and wireless execs didn’t plan for the future properly and haven’t charged their customers (i.e. me) enough to be a viable business then that’s their problem and their issue is with their customers and their stock holders—not Netfix (or Google or Apple, etc.)

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