Saturday, April 23, 2011

How long can Netflix's luck last?

The two most remarkable success stories since I started this blog four years ago have been Apple and Netflix. Both have continued to hit new record levels of success long after the doubters predicted they would run out of steam. Certainly I regret not buying either stock — either at the beginning, or at least during the dip in late 2008.

However, to me their strategies seem fundamentally different. Apple is both vertically integrated and pursuing related diversification to create new markets. Netflix is finding other modalities to do the same thing.

On Saturday morning, the LA Times website published a story highlighting its looming competition:

Netflix's days without competition may be numbered
Some big firms are said to be lining up to challenge Netflix, the only company that streams a large selection of movies and TV shows online by subscription. But is it already too big to be unseated as the dominant player?

By Ben Fritz, Los Angeles Times
April 23, 2011
Now Apple (despite naysayers) has done a great job of fending off competition on iTunes, iPod and iPad — but obviously Android has had a big impact on its iPhone market share (if not its profits).

Netflix’s traditional business was threatened previously by Blockbuster and Walmart, but so far the challenges have fizzled out (as Blockbuster continued its CFIT — in this case Chapter 11).

The LA Times is not really interested in another dot-com success story. Its interest, as the house organ in a company town, is on the effect Netflix has on the media industry. The movie companies don’t want Netflix to be their monopsonist any more than the record companies wanted Apple and iTunes to be a monopsonist.

So in the story is a bit of longing by the LAT’s sources — a desire by Hollywood to have more distribution options, even if the evidence thus far suggests that is a fantasy.

To his credit Fritz doesn’t take a position either way. He’s right: so far, it’s too hard to call. Everyone wants to dislodge Netflix — notably Amazon, Walmart, Hulu and Dish Networks/Blockbuster — but so far no one has.

I particularly liked one line that captures the reality distortion of the SV view of Netflix:
Netflix has a number of advantages that make it difficult to challenge, such as sophisticated software to recommend what users might like to watch and a brand name that's becoming as familiar as Starbucks.

But retailers and cable companies have their own marketing strengths and reach huge audiences, including many who don't live in affluent urban communities where the lack of a Netflix subscription can elicit gasps of surprise.
The Netflix mania reminds me of the TiVo mania five years ago. All manias reach a peak, but so far the Netflix peak is nowhere in sight.


Vince Kuraitis said...

Strikes me that switching costs and lock-in are very different between Apple & Netflix.

Switching costs from Apple are high -- investment in hardware, familiarization with interface, SW tied to hardware (Safari, iOS, iTunes), etc.

Apple also benefits from indirect network effects of base of developers and applications, many of which are customized and/or unique to Apple platform.

Thus Apple's customer lock in is high.

Netflix? different story? We have Netflix and it strikes me that the hassle of switching could be low -- just sign up with another co.-- my contract is month to month. What do I lose? ...time spent learning a new web interface, a few personalized suggestions -- no big deal.

Seems that Netflix will be particularly vulnerable during transition from DVDs to streaming video. Someone who dangles a better streaming option could make DVDs irrelevant.

I don't even think of Netflix as a platform. While Netflix connects to other platforms (e.g., Rotten Tomatoes), I can't think of apps that connect to Netflix, certanly not 300K like the iPhone.

Bottom line: Netflix has very little customer lock-in and low barriers to entry.

Joel West said...

Vince — You’re right, I missed that.

The more fundamental point I think is that distribution is a commodity, but a device is not. If others can do a good job, then as you say people can and will switch. (Or perhaps the new entrants will capture large share from the people who haven’t decided yet).