Netflix: David Becomes Goliath
Netflix is considered a classic example of innovative strategic planning. From the outset, it was designed primarily as an internet-based company, unlike its principal rival, Blockbuster. The early history of Netflix is a study in looking forward to gaining and keeping a competitive advantage. Remember Porter's Competitive Forces Model as you read this chapter. The pressures of all five forces are present as Netflix tries successfully to enter and eventually command a competitive advantage in the rental film industry. As you read the case of Netflix, consider the following question: What are the long-term threats to Netflix? (Hint: Consider changes in technology and copyright/patent/media law). How would Netflix overcome or avoid those threats and continue to have a competitive advantage?
From Atoms to Bits: Opportunity or Threat?
Access to Content
First the content. Two years after the launch of Netflix streaming option (enabled via a "Watch Now" button next to movies that can be viewed online), only 12,000 videos were offered, just 12 percent of the firm's long tail. And not the best 12 percent. Why so few titles? It's not just studio reluctance or fear of piracy. There are often complicated legal issues involved in securing the digital distribution rights for all of the content that makes up a movie. Music, archival footage, and performer rights may all hold up a title from being available under "Watch Now". The 2007 Writers Guild strike occurred largely due to negotiations over digital distribution, showing just how troublesome these issues can be.
Add to that the exclusivity contracts negotiated by key channels, in particular the so-called "premium" television networks. Film studios release their work in a system called windowing. Content is available to a given distribution channel (in theaters, through hospitality channels like hotels and airlines, on DVD, via pay-per-view, via pay cable, then broadcast commercial TV) for a specified time window, usually under a different revenue model (ticket sales, disc sales, license fees for broadcast). Pay television channels in particular have negotiated exclusive access to content as they strive to differentiate themselves from one another. This exclusivity means that even when a title becomes available for streaming by Netflix, it may disappear when a pay TV window opens up. If HBO or Showtime has an exclusive for a film, it's pulled from the Netflix streaming service until the exclusive pay TV time window closes. A 2008 partnership with the Starz network helped provide access to some content locked up inside pay television windows, and deals with Disney and CBS allow for streaming of current-season shows. But the firm still has a long way to go before the streaming tail seems comparably long when compared against its disc inventory.
And there's also the influence of the king of DVD sales: Wal-Mart. The firm accounts for about 40 percent of DVD sales - a scale that delivers a lot of the bargaining power it has used to "encourage" studios to hold content from competing windows or to limit offering titles at competitive pricing during the peak new release DVD period. Taken together it's clear that shifting the long tail from atoms to bits will be significantly more difficult than buying DVDs and stacking them in a remote warehouse.