the on demand fight. (why Netflix can't

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Information about the on demand fight. (why Netflix can't
Business-Finance

Published on June 14, 2010

Author: drogier

Source: authorstream.com

the on demand fight. Why Netflix isn’t even trying to win.: the on demand fight. Why Netflix isn’t even trying to win. David Rogier & Jesper Sørensen Stanford Graduate School of Business Where do you buy music?: Where do you buy music ? PowerPoint Presentation: iTunes Where do you buy books?: Where do you buy books ? Where do you watch on demand TV shows and movies?: Where do you watch on demand TV shows and movies ? Why isn’t there 1 aggregator of on demand TV shows and movies?: Why isn’t there 1 aggregator of on demand TV shows and movies? …and just 3 weeks ago, Netflix announced it doesn’t want to be that aggregator.: …and just 3 weeks ago, Netflix announced it doesn’t want to be that aggregator . PowerPoint Presentation: Netflix is the physical DVD aggregator But in their own words: they will no longer carry “everything ever made”; they will just stream a “segment” of content Netflix will now be “like having both a motorcycle and a car.” Netflix will be the motorcycle. It’s already happening…out of their own “Netflix Top 100”, only 7 are available for streaming Why doesn’t Netflix want to be the aggregator? Why isn’t there 1 aggregator?: Why doesn’t Netflix want to be the aggregator ? Why isn’t there 1 aggregator? one reason.: one reason. pricing.: pricing. to be the successful aggregator your pricing plan needs to meet 3 criteria. : to be the successful aggregator your pricing plan needs to meet 3 criteria . price discrimination + long tail economics + pricing plan purity: price discrimination + long tail economics + pricing plan purity PowerPoint Presentation: Criteria #1: price discrimination Aggregators must be able to charge different prices for the same product (e.g. more for new releases) Why? Because content providers know people will pay more for it, and they control the content. PowerPoint Presentation: Criteria #2: long tail economics Aggregators need to have a profitable way to provide long tail content (e.g. older TV shows, B movies). The problem : people want to pay less for long tail content, but it actually costs more. Why? Content providers charge aggregators a fixed fee for streaming content (even if no one watches it), but variable fees for DVDs. Source: Netflix’s 10k. http://files.shareholder.com/downloads/NFLX/937536901x0xS1193125-10-36181/1065280/filing.pdf PowerPoint Presentation: Criteria #3: pricing plan purity Aggregators need to keep their pricing plans simple. Complex pricing plans slow user adoption and tiered pricing plans signal the (lack of) value of the content. Who meets all 3 criteria? No one. Yet.: Who meets all 3 criteria? No one. Yet . Why not iTunes?: Why not iTunes? iTunes can easily price discriminate (e.g. charge more for new releases). But it can’t support the long tail. People are only willing to pay a tiny amount to see a B movie, but iTunes can’t lower the price. If iTunes charged $0.69 for a B movie, not only would iTunes not make any money because of the fixed royalties, but content providers would hate it. All of a sudden a 2 minute song is worth more than their 2 hour movie. Content providers could start pulling their content from iTunes. Why not Netflix?: Why not Netflix? Netflix is compatible with long tail economics. Their monthly subscription fee forces infrequent users to subsidize the long tail. Plus, it doesn’t devalue content. Netflix can’t price discriminate. Right now every movie and TV costs the same to watch. If Netflix introduced a “premium service” or a pay per movie service, it’s admitting that the rest of their content is second rate. It also introduces more complexity into pricing – which Netflix has worked hard to simplify. Source: Netflix’s strategy deck. http://www.slideshare.net/reed2002/netflix-business-opportunity#40 Why not cable providers?: Why not cable providers? Cable providers (e.g. Time Warner Cable, Comcast, DirecTV) can support pricing plan purity and long tail economics. But they can’t price discriminate if they become aggregators. Currently cable providers offer A content via pay per view and B content through via their premium channels (HBO, Encore, Starz ). If cable companies offered B content on demand for an additional fee it would cannibalize their premium (and very profitable) channels. For example, premium channel fees contributed 10% to Time Warner Cable’s video revenues Source: Time Warner Cable’s 10k. http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=TWC:US What will happen?: What will happen ? We will have tiered aggregators: We will have tiered aggregators Premium content : iTunes, Amazon Video on Demand, cable providers, Hulu Netflix will stream the long tail : prior season TV shows, classic movies and some new releases Aggregators will be squeezed by content providers and delivery devices: Aggregators will be squeezed by content providers and delivery devices Content Providers (studios, ABC, Fox) Aggregators (Netflix, iTunes) Delivery ( GoogleTV , DVR, Xbox 360 ) Content providers will aggregate: Content providers will aggregate Content providers will join forces to create their own aggregators (e.g. Hulu ) But they’ll struggle to unify their content and divide profits. For example, just recently, Comedy Central pulled it’s content from Hulu to capture more advertising revenue Content providers will continue try to fragment the on demand market. They don’t want one aggregator (unless it’s them) Delivery devices will fight for it: Delivery devices will fight for it Devices ( GoogleTV , Android, AppleTV , Roku , XBOX 360) will fight to unify media Whoever wins, will fight (or buy its way) to be the aggregator Netflix is hedging this risk by getting onto every possible device (Play Station 3, XBOX 360, Roku , GoogleTV ) So, what should Netflix do?: So, what should Netflix do? Why is Netflix banishing itself to long tail content?: Why is Netflix banishing itself to long tail content? Why doesn’t Netflix want to be the aggregator? : Why doesn’t Netflix want to be the aggregator ? Because, it can’t win.: Because, it can’t win. the so what.: the so what. Netflix can’t be the aggregator. Netflix (and everyone else so far) can’t figure out how to meet all 3 pricing criteria. So Netflix’s best option: Be the best long tail content provider. How? Build the biggest long tail streaming content catalogue. Then sell to whoever wins the aggregator fight (e.g. delivery device, cooperative of content providers). Keep getting on every device possible to get more viewers to watch the long tail—lowering costs. the end.: the end. David Rogier (drogier@stanford.edu) Jesper Sorensen (Sorensen_Jesper@gsb.stanford.edu)

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