The new dynamics of Netflix

By Felix Salmon
July 13, 2011
post on Netflix, including David Leonhardt reminding me about his profile of the company five years ago.

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I’ve received some very interesting reactions to yesterday’s post on Netflix, including David Leonhardt reminding me about his profile of the company five years ago.

There are three parts of that article which are particularly interesting today. The first is the thesis that Netflix’s success is based in large part on a long-tail model.

Every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer. “Americans’ tastes are really broad,” says Reed Hastings, Netflix’s chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want.

The second is the idea that the economics of Netflix were far from obvious:

The stock trades for about $27, down about $12 from its 2004 high. One fifth of its shares are on loan to short sellers betting it will fall further.

You can understand the doubts, too. At a time when cable and phone companies are running fat data pipes into homes, Netflix can seem a lot like the Sears catalog of the early 21st century.

And the third is the look forward to Netflix’s own streaming offering:

The company has been hiring engineers to build its own download site, which, with a familiar brand name and all that information about what people like to watch, may be formidable.

But it could be years — 5? 20? — before downloading approaches the size of the DVD business.

Netflix’s stock, of course, has turned out to be a veritable wonder over the past five years: it’s currently at $291 per share, more than ten times its level when Leonhardt was worried about its prospects. It turns out that while people were worried about Netflix at $27 per share when it was based on a long-tail model, they’re much more excited about Netflix at $270 per share when it’s based on a live-streaming model.

The people who still think of Netflix as a queue-and-DVDs site, I think, are a bit like the people who think of Amazon as a bookstore, or of Apple as a computer maker. The whole reason that Netflix is at $270 a share rather than $27 a share is streaming, and if you have a subscription-only account at Netflix, the famous queue, which I loved, disappears entirely.

The queue was a great way of putting together a list of movies you really wanted to see, and then going through them slowly, at your own pace. Sometimes certain movies weren’t available, but that was OK — there were always other movies that were available, and you knew that sooner or later the ones that weren’t available would show up.

With a streaming-only account, however, all of that goes away. Let’s say you’re having a dinner conversation about arthouse thrillers featuring an A-list actor and a much less well-known but very beautiful female co-star, where nothing much happens amidst lingering shots of beautiful scenery. With the old Netflix, you could put The Passenger and The American into your queue next to each other, and probably watch them back-to-back, if you had four hours to spare. With streaming-only Netflix, you wind up being faced with something unhelpful like this:

passenger.tiff

There’s no option to add either movie to your queue; instead, your only choices are to sign up for the DVD option at $8 per month, or to watch something completely unrelated. If and when Netflix does manage to get either of these movies into its streaming library, you’ll never know.

Which is one reason why Netflix is going to serve up many fewer highbrow films on instant streaming — that’s what happens when you kill the queue. The long-tail business model turned out not to be the salvation of Netflix after all; rather, all that matters is convenience. The Passenger‘s not available? Never mind, let’s watch Frankenstein Must Be Destroyed instead.

What does this means for the future of Netflix? Probably a small minority of arthouse types will defect to GreenCine, but they won’t be numerous enough that anybody at Netflix will care. There’s always a tension between quality and and convenience — Kevin Maney wrote a whole book about it — and there’s no doubt which one wins in the marketplace: convenience, every time.

Netflix got its toehold in the market by being more convenient than Blockbuster; it’s now doing to its DVD business what it initially did to DVD-rental shops. The wonderful long-tail qualities turn out to have been an incidental benefit more than a core value proposition. The streaming service will be the main part of Netflix; the DVD service will be kept on by the arthouse long-tail lovers who don’t go to GreenCine.

The big questions is what will happen to the people wanting to see blockbuster recent releases. Will they sign up for Netflix DVDs? Will they move to Redbox? Or will they just make do with whatever happens to be available on streaming? Any ideas?

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