Sunday, August 14, 2011

NETFLIX meets the Grim Reaper

We all know and love NETFLIX. Well - at least most of us! Nearly instant access to movies was the fundamental value proposition and since 2008 they have got a lot of loving and their stock shows it.

But now they have a problem - a big problem. It has always been there, even way back in 2002. How do you convince the media companies to let you have their programming? I should know - I gave up on a digital movie streaming model based on a monthly fee that year. They did not wait for permission and gave up on the "instant access" - instead they used the existing rental agreement framework used by companies like Blockbuster and came up with a much more efficient method of finding the CD or DVD you wanted, and getting it to your home by using the regular mail. So it was not really instant - but it  was much easier than driving to the rental store, and most importantly, much easier to return it! Whereas Blockbuster made money off people who were done watching and just could not get around to returning it (and possibly paying $30+ for a single view) when they did rent,  NETFLIX made $8 a month every month on movies that were sitting in your place still waiting to be viewed. You could theoretically watch movies for under a buck if you tried hard enough, but of course you were too busy for that. In 2008, with the economy tanking, and a lot of people with time on their hands needing entertainment, this was real value.

Then came REDBOX. They took that $1 price and made it a truly per view price. Back to the Blockbuster model, but now the price is much lower and the outlets are where you would be most days anyway, so it is even faster access than NETFLIX, but with a narrower selection. NETFLIX isn't looking so good anymore and to compete they go for digital streaming and "instant access".

There are two parties that hate this. The media companies are looking at pay per view, and with digital streaming on a monthly charge, this can get to really low values. Instead of the $8 being spread across 8-10 movies max a month, it is possible to watch 300+ movies a month. NETFLIX would make under 3c/movie at that rate, and that is not enough to make the media company happy. I know this happened - I spent a couple of weekends watching back to back episodes of some TV shows. The other party that hated this was the ISPs, their bandwidth requirement to the peering points and their business model just completely blows up. NETFLIX is unhappy too, because 3c is probably not enough to pay for the transmission cost of sending the movie from their site to the peering point.

The reaction was swift and extreme. ISPs instituted expensive data caps, and some repeatedly break the connection. This forces the stream to be resent. Upshot - I wound up paying $80 to watch one movie with repeated hangs! That was the end of NETFLIX for me. But NETFLIX also has a problem with the media companies.

There are technical solutions for the bandwidth problem, and also for the business problem. I sure hope Reed Hastings will find some that work, and make it possible for that vision in 2002 to be achieved.

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