Will Netflix business model crash as entertainment streams converge?

Netflix’s stock price is falling, fast. My take is that the decline has much more to do with the long-term viability of its business model than the stated cause – recent defections in subscribers owing to a change in its pricing formula and a (since averted) break-up of the company into two parts.

Here’s a business model lens on Netflix’s issues.

Boundaries are melting in the entertainment world as content that used to be available in only one way becomes accessible in multiple ways. We can see TV shows on the Internet, read physical books on-line, use videogame boxes to watch movies-on-demand and buy hardware solutions that transfer data streams acquired on our computers to our TV screens. Hollywood’s new UltraViolet System will give consumers free Internet or cable access to any purchased DVD.

What’s the implication for Netflix of convergence to one entertainment stream, be it virtual or someday physical?

Just a few years ago, Netflix’s DVD business model was unique and vibrant. It provided a service of mailing movies to our homes with a compelling value promise – more convenience, more choice and a set price/month that made renting a movie you didn’t like risk-free. No wonder Blockbuster, with its expensive retail stores and fines, went bankrupt.

Furthermore, content providers offered Netflix attractive prices to reach its growing customer base. Great rates enabled Netflix to offer free on-demand viewing over the Internet as a value-added subscription benefit. But what happens to Netflix’s negotiating position with content providers as movies-on-demand offerings via Internet streaming increasingly replace DVD rentals?

As content converges to a singular stream Netflix faces an increase in competitors who help us sift through options, find what we want and enrich our experience. Amazon, Apple, Microsoft and Google become much more important competitors as streams converge. With this dramatic expansion in competition, where’s Netflix other than wishing it sold out to another company when its stock price was higher?

These competitors have advantages that enable them to bring more to the table than just  “connecting you to content without ads.” For example, Apple, Google (thanks to its Motorola acquisition) and Microsoft’s gaming business can all stream Internet video into our TV screens. The content providers, who will hold growing power in the converging stream world, will likely give their best prices to those with the largest audiences, a big risk to Netflix.  And, because these competitors have other revenue sources that will allow them to undercut Netflix’s prices, they will likely have the best subscription rates.

What could Netflix do to retain its high stock price and warrant charging a premium? Netflix’s only play is to build a brand that so exemplifies its customers’ love of movies that Netflix becomes the go-to place for movie magic. They must become what the Wall Street Journal is to a business leader and the NYT is to an educated liberal.

What might a brand for the No. 1 choice for movie lovers and consumers look like?

  • Netflix film festivals in local communities.
  • Netflix podcasts sharing the history of film.
  • Netflix radio shows interviewing directors and actors.
  • A world class search engine.
  • Netflix on-line movie discussion groups.
  • An inventory of every movie ever released.
  • Netflix film school scholarships.

 

And at the outer edges of its brand, Netflix might consider:

  • Netflix movie theaters.
  • A Netflix movie studio to support emerging filmmakers.
  • In this world, film content providers would put Netflix on the top of their partner list as movie lovers consume a disproportionate share of movies.

Instead, we see Netflix focusing on TV shows (spending $1 billion on two TV shows recently) and games and who knows what else in its search for revenue. They’re ignoring the smart moves of niche (indie, foreign and classic) movie sites filling in where Netflix’s offering is thin.

 

Even renowned movie-critic Roger Ebert, who says he “treasures” Netflix overall, criticizes its mainstreamed content and search engine. Finally, Netflix tried to force not just higher prices but the inconvenience of two subscriptions for any movie lover who enjoys DVDs and movies-on-demand.

Netflix understands hockey-great Wayne Gretzky’s advice – skate to where the puck is going, not where it is. Netflix is trying to play where the puck is going – it knows convergence is happening. But Neflix appears to not understand what move to make with its hockey stick. When markets converge and you lack advantages against larger players, you must carve out a niche and dominate it. It’s the only way to stay in the game.

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. She served as chief economist for former Wisconsin Republican Gov. Lee Dreyfus. Plantes provides expertise in business model innovation, strategic leadership and smart economic policies.

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