Some thoughts on Netflix

After our class discussion regarding Netflix and its success, I became interested in learning more about Netflix business strategy. In this short analysis, I will discuss Netflix current status, how Netflix may respond to the challenges of Blockbuster’s reaction to its popularity, and how it is adapting to the growth in popularity of streaming video websites.

Netflix Summary

Netflix was created after Reed Hastings, the founder, had to pay $ 40 in Blockbuster late fees for Apollo 13. The company was launched in September 23, 1999 (Raman, 2009). In 2000, Netflix offered to sell a majority stake in the company for a US$ 50 million investment from Blockbuster. The Blockbuster executives rejected the offer, and instead signed a 20-year exclusive deal on video on demand with Enron (Harris, 2008).

In 2003, Netflix patent was granted and it began functioning on a new business model.  Chang (2008) explains that in the conventional model customers go to the store, select movies, take them home, and have to return them by a particular date or be charged a late fee. The Netflix model allows customers to pay a fixed monthly fee, create a queue, and order from the Internet.  According to the researchers Sunil Kumar, Achal Bassamboo, and Singh Randhawa, who studied this type of rental system through a mathematical model, Netflix became a great success because it didn’t create deadlines for the movies.  They also found out that the company needs to stock only a small quantity of the total demand for any video and offer a good service. The success of the model depends on the fact that Netflix customers cannot rent another movie if they don’t return one. The researchers also point out that the customers’ wish lists give the company real insight of the movies that the customers want.

In 2008, the company was worth US$ 1.9 billion while Blockbuster was valued at US$ 345 million (Harris, 2008). Presently its 10th year, Netfilx has delivered 2 billion movies and it has approximately 10 million subscribers. Besides the now traditional online rental and paid delivery, the company is also streaming videos on its website, through Xbox 360, TiVo, and Samsung Blu-ray disc players (Raman, 2009). According to the company’s website, Netflix has approximately 100,000 titles while a neighborhood video store has only 3,000.

Blockbuster after Netflix

As Netflix expanded, Blockbuster decided to drop late fees, but it had a tremendous impact on profitability because those fees accounted for 16% of its revenue (Harris, 2008). Blockbuster has a storefront business model, which requires the company to rent relatively expensive locations in strategic neighborhoods, while Netflix can utilize distribution centers in industrial areas. As competition became more intense Blockbuster had to close approximately 2,300 stores between 2005 and 2008.

In 2009, Blockbuster announced its plans to partner with 7-Eleven, the United States’ largest convenience store chain.  The goal of the partnership was to create “destinations”, where everybody could rent a DVD and even buy electronics gear, while at the same time Blockbuster.com begin featuring plenty of content to be downloaded or streamed. Staff at those destinations would also help customers learn how to download a movie or stream a video. What Blockbuster did was diversify sales to compete with Netflix (Nash, 2009).

In addition to the competition with Netflix, Blockbuster also has to worry with the growing trend of video on demand, file-sharing services, Wal-Mart, which is responsible for 37% of all U.S. DVD sales, and also cable companies that are promoting Personal Video Recorders.

Netflix and the future

In an article in Business Week, Albretch (2009) mentions that more people are watching streaming videos on Netflix during the American economic crisis. The CEO Reed Hastings affirmed that millions of subscribers are utilizing this service and renting fewer movies; they called it the “substitution effect.” Hastings emphasized that with streaming videos subscribers have instant gratification, and he was very positive about it.

We already know that there is a trend in favor streaming videos with the success of YouTube, Hulu, Vimeo and other streaming video websites. According to a study released by comScore in January 2009, US internet users viewed 12.7 billion online videos during November 2008 alone. Can the streaming video business ruin the perfect mail delivery business of Netflix, and what is Netflix doing to adapt its own business model?

On the positive side, Netflix subscribers need to pay at least the minimum subscription plan to be able to access the streaming videos catalogue. Besides, the transition to streaming video will be gradual. Even though the United States have a high percentage of Internet users – if I am not mistaken, it accounts for over 70% of the population, many people, including myself still have problems watching long streaming videos: the Internet connection may be too slow, ISPs don’t provide reliable service, and technical glitches and compatibility issues can be very irritating. There are some infrastructural problems that restrain the substitution of online videos for DVDs.

On the negative side, Netflix has built a very complex and efficient mailing system, as we discussed in class, with its perfect envelopes that costs the minimum postage price and made with a color that called people’s attention to minimize losses. By introducing and increasing the number of online titles, they are making their own primary business obsolete. One may argue that Netflix business would become obsolete anyway, as far as streaming video continues to grow.  However, Netflix is not fully adapting its business in a way it would allow it to maintain its profit if it transitions entirely to streaming videos. Netflix is allowing users that pay cheaper subscription plans to watch as much content as they want, making their tiered pricing model unworkable. Also, although Netflix is driving more and more people to its website, it does not make good use of the page views: there are no ads on the website or in the videos, and there is no access control – you could definitely give your username and password to your mom and she could watch videos without paying the subscription.

I believe that Netflix will continue to lead the video rental market until other streaming video sites, such as Hulu, become more compelling competitors. Although Blockbuster is launching several initiatives to attract more consumers to the “destination kiosks”, I don’t see how a physical fixed location can be more convenient than the Internet and why Netflix subscribers would switch to this model. I also think that people pay Netflix because of the convenience of the mailing system, no late fees, and because many titles are not available for free on websites that offer the service. If other websites are able to add more titles supported by ad revenues, people who seek instant gratification will definitely go there. Of course Netflix will have great opportunities to profit using the information it has been gathering on its queues and its customers’ habits, which is another advantage over Blockbuster. They could use that information to create more engagement on its website and earn revenue with ads, or add features to allow friends to watch the same movie simultaneously and share comments, they could perhaps create online movie sessions with more people, they could charge for these private online movie events, and of course they could guarantee satisfaction by having pretty much any title that people want to see.  I truly believe Netflix has been a tremendously innovative company, but I have not yet seen evidence that they are adapting to switch to streaming online content. It would be sad to see a company like Netflix become another lost website on the Internet.

References:

Albretch, C. (2009, February 6). Netflix: It Feels Like the First Time. Business Week. Retrieved from http://www.businessweek.com/technology/content/feb2009/tc2009025_446813.htm

Caddell, J. (2009, February 11). Frontiers of innovation – Netflix demolishes own business model. Message posted to http://caddellinsightgroup.com/blog2/2009/02/frontiers-of-innovation-netflix-demolishes-own-business-model/

Chang, H. (2008, April 16). Netflix Broke the Rules and Won According to Stanford Business School Research. Reuters. Retrieved August 3, 2009, from http://www.reuters.com/article/pressRelease/idUS218079+16-Apr-2008+BW20080416

Emarketer. (2009, January 15). Online Video Growth Continues. Retrieved August 3, 2009, from http://www.emarketer.com/Article.aspx?R=1006868

Harris, J. (2008, July 10). A Blockbuster no more. Backbone Magazine. Retrieved from http://www.backbonemag.com/Magazine/Big_Ideas_07100801.asp

Nash, K. (2009, February 11). How Blockbuster Plans to Beat Netflix. CIO News. Retrieved August 3, 2009, from http://www.cio.com/article/480474/How_Blockbuster_Plans_to_Beat_Netflix

Raman, R. (2009, April 2). Netflix Net Numbers: 10 Years, 2 Billion Movies. Message posted to http://myfunbox.wordpress.com/2009/04/02/netflix-net-numbers-10-years-2-billion-movies/

Rappa, M. (May 2008). Case Study: Netflix. Retrieved August 3, 2009, from http://digitalenterprise.org/cases/netflix.html

Reflection on Journalism

I graduated from a four year program in Social Communication, major in Journalism, in Brazil. I worked for a newspaper that had the highest readership in Rio Grande do Sul, in the state where I lived, and the fifth highest readership in the country. I had reporter credentials and would ride through the city in the newspaper’s cars, and everyone would think that there was some element of glamour to my job. I worked with very experienced reporters who had years and years of experience interviewing, reporting, fact checking, editing, and publishing. They had many journalism awards, and I could foresee a bright career for myself reflected in their experience. I could feel a spark when I dug into a filthy story, a flash when I heard that perfect sentence in an interview that would fit the outline I had planned, and I would absolutely love to be with people, talk to people, and learn with people every single day.

I decided to study online journalism because I started seeing changes with the Web 2.0, and then Web 3.0, but at that time I could only think that journalism was getting better, and that we were more successfully communicating with our audience – all thanks to the technology. I ended up writing my thesis on newsworthiness criteria in Second Life, forecasting our virtual world reporting, and our lives in the abstract definition of virtual from the cyber theorist Pierre Levy. However, going back to the reality in our virtual world I realized that not only I was a blogger but so were all of my friends – even the engineers. I also noticed that the newspaper that employed me was laying off more and more people, that they had started seeking for different ways to make money, and that they even had created a tabloid with nude women on the front page and numerous pages about soccer and crimes. Some of the bloggers became very popular, and suddenly we were all on Orkut, the Google social network that is extremely popular in Brazil. The newspaper went through a massive restructuring- they wanted to have a more serious online news site, they wanted to have immediate news – oh, they would not think of Twitter at that time, and they wanted to get more ad revenue from the website. The website started losing value because it became packed with ads. All of this happened in a period of three years.

I quit my job, I abandoned my hopes of being a journalist – at least the way I thought that I would be when I went to college, and I decided to look for a Masters in Digital Media. I needed to understand these changes. When I finally got into the masters program at UW the director said: Raquel, journalism is dead.

So then last class we were discussing examples of good hyperlocal journalism, and one of my classmates brought up the fact that our guest speaker, Cory Bergman, from myballard.com was valuing the experience and quality of his journalists, and for a moment I didn’t feel that I had spent so many years of my life doing something that was disappearing. Journalism is worth it, I thought. And then, couple of minutes after that, we went back to the discussion that “we are all journalists now”, that we don’t need to go to college to write well, that many good journalists were not trained is a small market niche. I can see news saturation in a short period of time when more than two media organizations cover the same neighborhood. Even though the newsworthiness criteria change in hyperlocal journalism –even the cute puppy you see on the street becomes news – people do not have time to check more than one news source and they do not have patience to see the same bike accident twice, although they may have patience to see the puppy twice.

In the other part of the class we discussed journalism being publicly funded, and I just felt bad thinking of journalism as a non-profit organization. It felt like news was some sort of deep and serious problem in the society, analogous to disease, poverty, and environmental degradation, for which we would have to raise money to help alleviate. Do I see future in that matter? No, I don’t. Thinking especially of the third world, I can’t imagine a person who is going to donate a cent to news when you walk out your door and see children begging for money. You don’t need the news to see the problems in your country. If you want to support a cause, you are not going to help someone to write about the problem.

So what now? I ask how scribes felt on those days when they were seeing their profession disappear with the emergence of printing. Those scribes that one day were so important, that would spend so many hours of their lives enhancing their calligraphy with more practice, that would be improving fonts to increase readability, that were so necessary to spread information, knowledge and culture, they were gone. At the end of the day, what did they do? According to the Wikipedia, “later the profession developed into public servants, journalists, accountants and lawyers.” I always thought that people disliked lawyers more than journalists, but apparently all the glamour of the journalism profession made everyone else to find their own shinny light and sparks.  And now we are just waiting for our extinction.

Reflection based on blog notes

Unfortunately, I was too sick to go to the class yesterday, so I stayed at home resting, trying to recover from a possible ulcer (doctors haven’t found out yet, I am hoping to find a gastro-intestinal specialist available in the next days).  I am feeling better today, so I will post.

First of all, I really enjoyed watching Rubi’s video. It was very creative, short, and I am sure that it took her a long time to capture all those images. Good job. It was an inventive way to tell the story of journalism and to start a review with an inquiry. I really liked her voice too, it sounded very pleasant and clear. I truly believe she should work with radio (should we say podcasts?).

Second, I did look at the humanclock.com and I am not sure if I understand it. Well, in reality I would say that there are many things online I don’t get it. When a person first told me that other people were spending their precious minutes “typing sentences to say what they are doing”, in other words, twittering, I found ridiculous. Nowadays, however, you can find me twittering too. So, going back to the humanclock, do they keep showing the same pictures day after day? Is the same set of pictures for 7:24am to 7:24pm? I felt curious about it and I might check it some other time. It amazes me that people create all these strange businesses online and there are so many people who readily begin using them. After reading Wikinomics, I keep thinking about getting an MBA and coming up with an idea that sells, though not necessarily a bright one. 

Third, I would like to say I really enjoyed this class. It was very challenging for a new international student, but I can confidently say I learned a lot in this quarter.

Children, Education and Internet

Even though we had several interesting discussions in class last night, I believe I was most interested in Howard Rheingold’s concerns about children’s education. I have asked myself before how the internet has been changing the way kids learn and research.

I remember when I was in elementary school our research sources were basically limited to magazines, newspapers, textbooks, and encyclopedias. We would photocopy the material (especially figures), would glue them to our notebook, and would have photocopied illustrations with a handwritten subtitle. The homework text would be a summary of three to five resources and my classmates wouldn’t turn in different work.

Today, with Internet and web tools, children are able to look for very specific themes, have information from different sources from all over the world, and contrast diverse points of view. They can watch videos to make the homework more interesting, listen podcasts, participate in virtual communities, and use virtual environments to discuss lessons, such as the world Second Life.

Moreover, children can communicate to their classmates much more quickly and easily than we could do in the past. I still remember that when I was a kid and had to call my classmates to discuss a group project, my mom would be controlling the time I was spending on the phone. Today, children have cell phones, laptop computers, Skype, and all kinds of tools that facilitate interaction.

I believe professor Howard had an interesting point when he said that children need to be taught how to question authority. Even though there are procedures to check information, people –especially young people – have difficulty adopting a critical attitude regarding the accuracy of information. When there are thousands of hits for a term search on an engine, it is impossible to guarantee veracity. I wonder if it was not actually easier to have fewer options to look at…

Changes in market structure

I believe one of the most important and general conclusions I reached reading partially Media Economics and The Wealth of Networks, and The Long Tail is that the changes brought by Internet are not superficial, but economically very profound. The new information technologies are moving market structures to another direction, after decades being anchored in the same model.

I found the explanation of four different market structures in chapter seven of Media Economics interesting: perfect competition, monopolistic competition, oligopoly, and monopoly. This order is from the most to the least competitive markets. The digital revolution, studied in the three books, is causing a decrease in market share concentration in some economic sectors, especially those related to information. If media markets are becoming more competitive, media conglomerates are becoming less powerful.

The barriers to entry in these markets are decreasing, since almost everyone has access to the new production tools. Chris Anderson wrote in The Long Tail that the XXI century is about an economy of abundance, opposing the past century and the economy of scarcity. Another barrier to entry that has been getting weaker is copyrights. The ease of distribution of information enhanced by Internet makes knowledge more available and leads more people to produce and share knowledge. Yochai Benkler spends a great part of his book discussing the open-source benefits and using successful examples as an incentive, such as Linux and Wikipedia.

On another topic, I found an article published by The Economist regarding Anderson’s long tail and citations in academic papers. It summarized research concluding that as more as journals become available online fewer articles are being cited in the reference lists of the papers.

More about intelligence (human, this time)

After last Economics class, I became convinced that we will still discuss artificial and human intelligence many times during this master’s program and perhaps afterwards. Mike Culver, from Amazon Services, was our speaker yesterday and among other things, he talked about the Amazon Mechanical Turk.

The website gives “businesses and developers access to an on-demand, scalable workforce”, as its definition on the first page. Trivial tasks are published on the website (ex: to draw a sheep) and people get paid a small amount of money (ex: $0.02) to accomplish these little jobs. According to Culver, there are people making real money from it. Nowadays, there are at least 200 thousand registered workers from more than 100 countries. Culver also explained that these jobs are called Hits (Human Intelligence Tasks) because even though they are simple functions they can’t be done by computers.

I was amazed by the number of people working on Mechanical Turk and I became curious about which part of the world they are from. Culver only mentioned that users have different backgrounds and different motivations to participate. However, I believe it is more likely these jobs are an alternative income for the “turkers”, who work very hard in different tasks. It would be interesting to know if there is a relationship between the number of participants per country, technology penetration in these places, and income distribution.

Artificial Intelligence?

I think the most interesting topic discussed last Monday was the development of artificial intelligence tools. T.A. McCann, our guest speaker, showed examples of online companies that have been improving programs that aggregate user information. He focused on a project that he is currently working on called Minebox.

Basically, Minebox will be a program to prioritize e-mails and contacts based on the frequency that users correspond, on the number of file’s exchange, and some other features. It will also provide information about the contacts and links to the contact’s personal pages (ex: LinkedIn).

In my opinion, this kind of new tech product is much more effective than the filters that are currently dominant. Filters are supposed to help users to find stuff online but many times end up confusing them. However, I am still not convinced that these programs are able to completely understand and predict personal behavior. I just believe they are excellent gadgets to organize and find information, which is a very-welcome feature in a world where people have been ceaselessly stocking, creating and divulging information.

Although we can publish almost our whole life online (Facebook, LinkedIn, e-mails, blogs, video sharing, and so on), we still have our offline existence, where the most important things actually happen.

Online Suicide and Anderson

Two points that were discussed last class especially got my attention. The first concerned the negative effects of networks and the second was Chris Anderson’s comparison between bricks and mortar and online retailers.

I was surprised by the shock of some class members when someone brought up the example of online suicides as a negative network effect. It has already happened in Brazil, not only in Japan. Two years ago a 16-year old boy committed online suicide in Porto Alegre, the city where I used to live. He used a method called “barbecue”, asphyxiating himself with the inhalation of carbon monoxide. He told his parents he was going to have a barbecue with his friends, asked them to leave the apartment, and fired the charcoal in the bathroom. He asked for instructions online, posted a picture of the bathroom, and left a letter for his parents. A retired American fireman in Chicago gave him instructions to pass out, because the boy complained that it was too hot in the bathroom in an online forum about suicide. A Canadian virtual friend of his became extremely worried when she saw the posts and called the police in Porto Alegre from Toronto. It was too late.

I was also interested in a question asked by one of my classmates concerning Anderson’s comparison between bricks and mortar and online retailers. In the beginning of chapter nine in The Long Tail (page 147), Anderson explains that less than 10% of American retail volume is online. I believe that he wrote about the traditional retailers because this business still retains an ample majority of sales volume even though it only offers the “head” of the curve. Anderson should have clarified this point in the beginning of the book because consumers accustomed to buy online (and perhaps MCDM students) tend to believe it is common.

Learning Goals for Economics of Digital Communication

The Social Communication (Journalism) course at Federal University of Rio Grande do Sul in Brazil, where I earned my bachelor degree, didn’t emphasize the economic aspects of Communication. During my entire four-year course, I only took one four-credit course titled Economics of Communication. For that reason, I believe this class will be very challenging. I will divide my goals in two types: personal and subject specific.

As personal goals, which might differ from other students, I want to improve my writing skills and to gain knowledge from my classmates work experiences. I think that my academic writing skills will develop more quickly if I write continuously and read constantly. Hence, the weekly post on the discipline blog will be certainly helpful. I desire to learn from the professional knowledge of my classmates, who are employed in different sectors of communications industry in Seattle and region, and to be able to compare them with the work experience I had in Brazil.

My subject specific goals are to have a better understanding of technology, economics and their impact on society, and a comprehension of how to make money from a non-rival and non-excludable good, such as digital goods. To define more precise concepts for information technology and for the new economy will help me to understand the transformation process we have been living for the last two decades. As a media professional, I believe it is urgent to know how to evaluate possible economics trends for digital media and, therefore, to learn how to make profit in a competitive and still unsettled market.

Criticism on a Book Review Lecture (about how to criticize books) by a beginner critic

During the Economics class last night, Dru Williams, master in Communication and Critical Cultural Studies from San Diego State University, spoke about the main questions we need to ask ourselves to analyze a book and to write a substantial and well-formulated book review. These questions, among others, were: what is the book’s contribution? What is its organization, its audience, its method? How does the author fail? What is the book purpose?

I believe that to be a questioner is one of the best ways to jump into a deep thought on an intricate subject, and for that purpose, I agree that an interrogation of the specific book, as Mr. Williams suggested, might work. However, what seems more relevant to me is, first of all, to do a self-interrogation. Students need to be aware of their own capacity to judge someone’s work. The fact that graduate students already earned a diploma doesn’t mean they are absolutely ready to deny or to support every idea that is born in their field. If they will expose and fight against an erroneous assumption, they must deconstruct it, compare it to different theories, and, if possible, to reconstruct it in a logical manner.

My second concern provoked by the lecture of Mr. Williams is the priority of the criticisms. Within a short piece of paper or a limited-space blog entry, what is indispensable to be criticized and what is negligible and can be left out? Depending on the book, there might be different parts that are not well-covered, that lack explanations, that have disorganized data, and so on. How should we know what is more important to write about? An idea that comes to my mind is the general contribution of the book. If the reviewer found the book, despite of its problems, interesting and useful, I believe it has to be clear to the potential readers.