The Netflix Announcement - My Take

A couple of days ago, I, like many others received the below email from Netflix CEO Reed Hastings. Since that time the Internet has been buzzing with responses (mostly negative) to the email, the changes, and Netflix in general. I have a different take. If you read most of the criticism it sounds something like this "Reed Hastings is a brilliant guy its amazing that he would make a blunder like this..." Perhaps if you think of business as a sprint, and the recent Netflix changes as a false start you'd be right. A better analogy might be chess. There are plenty of scenarios where the sacrifice of a single piece leads to winning the game. So here are a couple of reasons I believe Netflix has are the moves its been making.

1. Reality Check
   Up until now Netflix's primary expense has been postage. The 45 to 50 cents it takes to get us those red envelopes. It doesn't take a rocky scientist to see that depending entirely on usage patterns that business can be very low margin or a loss due to the cost of delivery. This upward cost pressure made an eventual increase in the price of the service inevitable. Secondly, while the Netflix streaming service started out as some nice extra change for content providers, they have figured out that just like the cable companies they've been exploiting with high content fees, they'd like to do the same with Netflix. This applies pressure to the company in two very important ways. 1. The cost of content greatly affects the math used to keep the service in the black as it grows. 2. Pressures the company to get rid of its commercial free model. One of the things that makes the service great is that at a lower time expense from cable or any other media, and at a lower cost, you get entertainment you want. Finally, Hastings realizes that his goal is not to be the cheapest option in addition to cable, he wants to be the replacement to cable.

2. The Master Stroke that is Qwikster
   My guess is that Qwikster remains in the Netflix tent for no more than a year. Hastings will use that year to show its profitability and success as an independent company (coupled with the 8 or so years of results before streaming was introduced) Then Qwikster will have a big for sale sign in front of it. Netflix will get a windfall of billions and the cash will be used for a content spending spree. (It should be noted that exclusive content deals expire over the next couple of years). With Qwikster out of the way, Netflix will be able to focus on becoming the new cable company. One that requires no onsite technicians, no cables, and hopefully no commercials. Remember the days when cable meant virtually no commercials? That would be Netflix for at least another 5-10 years. Further, by rebranding the mail DVD business, when it finally goes the way of the dinosaur, eight track, cassette tape and the floppy, no one will see it as a Netflix failure.

3. Content Rules
     Netflix knows that content rules as king. But they have also invested longer than anyone else in getting themselves a platform that s easy to use and works well. I'd be surprised if they hadn't also amassed a view patents along the way. This means that while their present spate of content is somewhat underwhelming, they can still pack a punch others can't. When the time comes, we may see them get back in the fight for Hulu or wait out their current content contract slump until they make a bigger splash. Once they do, you can kiss Blockbuster's soon to be announced streaming service and other comers goodbye. (Seriously, can Blockbuster do anything right anymore?)

Some of the comments have been frightfully naive regarding the Netflix pricing, Qwikster change. Netflix is first and foremost a business. Their job is to make money. Their costs are going to skyrocket next year and I'd rather pay a higher (but still way cheaper than $75+ for cable) price and have the service viable then have it disappear like so many too good to be true items before it. Hope I'm right, I really don't want to go somewhere else to stream..

The Hastings Letter:

Dear JAA, I messed up. I owe you an explanation. It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing. For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do. So here is what we are doing and why. Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies. I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service. So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently. It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming. Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready. For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you. I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly. Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions. Respectfully yours, -Reed Hastings, Co-Founder and CEO, Netflix p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

10 Things I'd Like to See Netflix do

     I love Netflix. I use it nearly every day. It is perhaps the most available service I have going. It's on my Playstation 3, my Wii, my PC, my Mac, my AppleTV, my iPhone and my iPad. So here are 10 things I'd love to see Netflix do. My main thoughts are as a consumer, but you'll notice some of these just might make the bean counters of the world happy too. 

1. Produce Original Content
     In recent years fan campaigns have kept (at least temporarily) some shows on TV. [See this and this] But in general lately the network exec trigger fingers have been very nervous. Good shows that need some time to catch on just don't seem to have a chance. Is there any show today that is the must see TV that NBC Thursday nights used to be, nope. So here is a space where Netflix could endear itself to fans. A portion of the enormous funds they have offered to host content from the networks could be used to "poach" good shows from the big three networks. I for one would be happy to see a 6th season of Chuck (albeit without Morgan as the Intersect) after NBC decides that its third attempt to cancel the show would be its last. If well done, this could prove an effective way to pull in some loyal subscribers especially if the paired their database of preferences with that of a certain 600 million user plus website. In addition to saving some of the legion of shows axed before their time each year, they could (very, very, carefully) launch some original content. (Time will tell if their first known effort will succeed. I hope it will)

2. Invest In Exclusive Deals
    The current tales of Netflix's demise all stem from a single problem, the lack of exclusive deals. In order to get around this they struck a deal with Starz to stream their content. (Recent renewal negotiations broke down and show no signs of resuming) In the years to come, as some of the existing exclusive deals expire Netflix will need to open its wallet wide to get some of that exclusivity to their service. The entrenched powers will fight hard, but let's face it, we are living in an internet world and   the strategy of replacing cable with on demand services as Netflix is could easily win the eyeballs of millions more than it already has. Just as the DVR has sort of killed the live TV viewing audience. Exclusivity will go a long way to making Netflix near as big as the competitors who have finally noticed it and are seeking to destroy it.

3. Buy Hulu
     Since they say they've stepped out of the bidding for Hulu I believe that it may not be a bad purchase. It opens the opportunity for a bunch of newer content and a couple of options for additional revenue streams. For example, they could add that content directly into their streaming service. Maintain the content as separate through the Hulu plus service, or add a tier to their existing offerings for this "premium content". Further keeping this content out of the hands of competitors with deeper pockets and larger advertising budgets may well be worth the price of admission.

4. Social Integration

If Netflix could implement some significant social integration they could really take advantage of the myriads of social media users worldwide. It could literally use Facebook to do its advertising for them. The advantage of a like button for every movie, show, and episode could be enormous for the provider. Not to mention the advantages of deep social integration through Facebook, Twitter and even Google+ whenever it gets fully off the ground. As mentioned earlier, the data collected from the millions of global preferences, could give them much better information than the networks use to determine what shows to axe. This could help Netflix to build on the promise that it has and start delivering on all of its potential. In the updated version of Frequency (which will undoubtedly be produced 10 years from now) Netflix could be the stock tip sent to the past instead of the now extremely lackluster Yahoo.

5. Get Older Eyeballs
     Conventional wisdom in marketing is to get them while their young and as a result everything we see is geared toward the young. Have you noticed that even in commercials for Depends, the people look too young to need them?? At present though we are living in a world that seems built for Netflix to buck conventional wisdom. Consider these factors before you scoff: 1: the population is aging, 2: Older content is dirt cheap, 3: Access to the service is simple and addictive. In this case, I  need to look no further than my own home. My mother is a fifty-something widow who is just slightly above computer illiterate. Despite this, she navigates Netflix with ease and frequency. She actually uses the service more than I do. Thus while they wait for some of their other initiatives to catch on, they can market to the folks who never got to see Netflix commercials in their youth. As their catalog improves even more will cut the cord and go to Netflix.

6. iCloud like service for Video
     Even before it launches i believe that Apple's iCloud service will be huge. A similar service for video could be equally great. In fact, having instant access just to my own collection of digital video would be great. Thanks to the multitude of lawyers in the world, I imagine that developing such a service would be infinitely more complicated. The added revenue stream and modernity that such an addition to the Netflix family would provide though, is probably well worth the effort.

7. Individual Rentals
    I have found Redbox to be a suitable alternative when I want to see a video that isn't available on Netflix. I would much rather have the option to instantly rent such a title. I can see a million reasons for them not to do this, but the part of me that is too lazy to drive half a mile to Seven Eleven would totally love this.

8. Add Music Videos to Instant
     Since MTV (formerly known as Music Television) has all but abandoned the music video. I'd love to be able to see these on demand, whenever I want to. And since the music video has never really been a money making enterprise, I think this should be an easy get.

9. Add Live Content
     I am not sure how well live content will do online. Youtube has recently added some live content and others have been considering it. I'll say this though, there is only one reason I pay the ridiculous amount I do each month for cable, and that is live sporting events. No streaming that I have had to date has proved suitable to me. If they could conquer this landscape, I would cut the cord and never look back. Seriously, have you ever met someone who loves their cable company??

10. Rewards Program
     I believe that Netflix should create some sort of rewards program that would reward their subscribers. This would be particularly useful when they inevitably are forced to increase their prices as they battle against cable and satellite providers in the not too distant future.

     Well, I doubt the guys ate Netflix are listening, but on the off chance that you are, please make my dreams come true!!

ILW

A Few Interesting Links for the Weekend..

XBOX TV?

Not punting ain't just for Madden

Should Microsoft Buy Nokia?

Windows 8 Split Personality?

Madden Review

Be Safe and May My Colts notch a win this Sunday!!

Making Microsoft a Sexy Tech Company - Part 3

So how about Google? Microsoft has to give up it's obsession with research and duplicating Google technology. They need to focus on developing technology that is compelling.

There is of course an elephant in the Microsoft stable. Facebook. You may have heard of it they have a few hundred eyeballs under lock and key. They also have that ubiquitous like button that tells the advertisers of the world what you want and where you go to get it. Microsoft needs to aggressively increase their stake in Facebook. Targeted advertising is the way of the future and Facebook is the king of the space. Admittedly Microsoft doesn't do young and fun well which is why they should lit the nerds in Redmond to making ridiculous amounts of money on it while Zuckerberg and the kids keep it hip.

Microsoft could with ease do any or all of these things. Hopefully, they won't figure it out after the party's over. They've done that more than enough times.

A few interesting links for the weekend (ILW)

A Strange Way To Cook

This Still Burns My Britches

This Makes Me Sad

Promising Change For Windows

Back To School Tech - 2011

12 Back To School Gadgets

NFL Teams Not Worried about Twitter

Since It's The Only Option, I'm Obliged

Language Tools

The world is shrinking, as a result more and more of us are learning or communicating in other languages. Having taken eight years of French (none of which I can remember) I know how challenging it can be to try learning a new language. Searching for the right tools doesn't have to be one of them. I can freely attest that Rosetta Stone is by far the best language tool I've ever used. (NOTE: I have not been compensated in anyway by Rosetta Stone nor have I had any contact with the company.)

Unlike other tools Rosetta Stone does not force you to memorizelists of words, verb tensesnor the like that often make learning another language so challenging. In fact, I have been using it for a month (to learn Spanish) and not once has it uttered a word in English. In fact, the way its laid out all you are learning is the new language the way a newborn would. I must say this method is brilliant. While I have the vocabulary of maybe a 1 year old so far, The things I know I am completely comfortable with. Soon I hope to actually write my Spanish posts rather than translate them online.

Finally something nice to say about Microsoft! For a while I've been worried I might be viewed as a Microsoft basher, I am not, but when it comes to translation Bing seems to get languages. In my personal life I do quite a bit of volunteer teaching and this some times leaves me providing assistance to teachers who are working entirely in Spanish. Using Google translate, I've been able to get my point across but usually only after the teacher corrects my bad grammer. Bing translate doesn't seem to have this problem and (at least so far) I haven't gotten any crazy looks. Maybe one day their search results will be equally superior to Google's. Of course, they have a way to go..

Making Microsoft a Sexy Tech Company - Part 2

     Microsoft can win the future through some bold and likely unpopular (at least in Redmond) choices. For example, having used a Mac I have seen the beauty of quality hardware combined with quality software. Too often (at least in part because license fees to Microsoft are a healthy slice of cost) PC manufacturers use cheap unreliable parts with even more dubious drivers on the Windows platform. This is a lose-lose proposition. The manufacturer gets a bad reputation, PCs in general get a bad reputation and Windows gets a bad rap. If this trend continues, Microsoft software could eventually be the software that people use just because they have to at the office. How to fix?

     Make your (their) own hardware. There are plenty of options, both HP and Dell have a market cap lower than the cash Microsoft has on hand Of course HP is selling off their Hardware business so the price should be less than their $46 Billion market cap. Microsoft could easily snatch up those assets and then work to integrate hardware and software (NOTE: Kinect for PC that only works on premium Microsoft Hardware, hint hint) This would be a huge shift from the innovate and share with the world method that Microsoft currently uses. It might anger some of their partners, but they would also be building a simple and valuable brand. Its try that this might accelerate the moves some of their partners are preparing to other platforms, but Microsoft ought to know that no one can afford to jump ship right now. But if they carefully and methodically moved into that space with quality by the time partners jump ship, PCs would be sexy for a change and frankly just like Macs, many would be willing to pay a premium for them. Which of course leads me to my next point.

     The entire marketing staff at Microsoft should be fired. Why? Who knows what a people ready business is? I mean what company on the face of the Earth (besides MSFT) runs ads for a product that doesn't exist? I have never seen a Microsoft ad that made me think, I just have to have that! (Don't get me started on those ridiculous Bing commercials) Thus, they should move in a completely new direction. What they need is a marketing genius that can get these new products (and old ones into the hearts and minds of everyone).  Too bad this one is not available.  What else does Microsoft need?

     Integration. Microsoft loves integration, but only in one place, within the Microsoft universe. As a result, the XBOX does not have Blu-Ray, Mac doesn't have Office, and I wouldn't be surprised if Skype starts to disappear from all non Microsoft platforms. I think this would be a big mistake. Instead of trying to stifle the rest of the world, recognize that a healthy computing ecosystem is better long term than a healthy and shrinking) Microsoft ecosystem in the short term. Imagine for a moment, running Microsoft Office on your android tablet instead of QuickOffice. In the end no one wants to use a cheap imitation (no offense, I use QuickOffice on my iPad) when the real thing is available. Imagine Office on Linux that works naturally. Imagine being able to actually collaborate with people anywhere in the world regardless of what platform all are running. Imagine Microsoft making money (legally this time) nearly every time a device is sold. Maybe then their Market Capitalization would return to the stratosphere it once easily inhabited.

In part 3, how to beat Google..

Making Microsoft a Sexy Tech Company - Part 1

     It's been a long while since I've written. Since my last post I've gotten an iPad an iPhone, a Mac book pro and an AppleTV needless to say, Microsoft has lost a little ground in my home.

     In fact in that time I have gotten rid of my XBOX as well. The problem is not really that Microsoft's products have somehow stopped being easy to use. They have just finally completely lost touch with what people want and how they want it. Sooner or later they will have to figure out that the "we are the big bully on the block" strategy will not work. Until they learn to play nice they are going to lose out to lesser competition. Obviously the boys at Apple are no longer the little pimple they were 10 years ago, but Microsoft is facong woes in every space they are in. Despite practically inventing the smart phone, they've lost the hearts and minds of the masses to Android and iPhone. Why? Because they continued to purvey uncool gray box phones the same way they personify the grey box computer. This is not entirely their fault as the folks at Intel can attest. (See story here.) Their partners at HP, Toshiba, Dell, Lenovo and the many other also-ran companies have solidified that image. This is where Apple, perhaps do to the sheer will of their now former CEO Steve Jobs excels.

     Unlike the boys in Redmond, the folks at Apple, don't view producing their own hardware as beneath them. True Microsoft makes its money licensing software, but imagine if Microsoft were to build a PC that took advantage of the many features that they pack into their software. Features that seem to only be emphasized while the software is being demoed at their many events.

     The MacBook pro is by no means a perfect device, I don't even know how to uninstall software not loaded through the app store, but I can use all the stuff the Apple team highlighted about their new Lion release.

     It's true Microsoft is still the big boy on the block, but most everyone believes their best days are behind them. I do not, but I think they need a radical shift in strategy to "win the future". First they gotta realize their losing that race. My thoughts coming in part 2.