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Netflix, Subscription and TV business

Does Procrastination kill you?  Yes, it just nearly killed this space, But I’m back, with some good insight on Netflix, Subscription and TV Business. Ready for some interesting read? Here we go.

Way back in 1992, just as the ‘Internet’ was starting to sound wow, a company in the UK used technology to disrupt television industry. Rupert Murdoch’s Sky realised that you could buy football rights, wait what? Yes, football rights for far more than anyone had ever thought of paying before, and you could make your money back by selling the games on subscription instead of pay-per-view or advertising, and you would be able to deliver that subscription using encrypted satellite channels. This was a big deal, both for Sky and for the Premier league, and it was the beginning of something much bigger.

Sky used technology as a platform to build a new TV business. Everything about how it executed that technology had to be good, and by and large it was. The box was good, the UI was good, the customer service and experience were good. If Sky had been showing reruns of 95/96 Premier league or Ashes no one would have signed up.

I look at Netflix in very much the same way today. Netflix realised that you could spend far more money on far more hours of scripted drama than anyone had ever spent before, and you could (hopefully) make your money back by selling it on subscription directly to consumers instead of going through aggregators, using a new technology, broadband internet, that both gave you that access and made it possible for people to browse that vast selection of shows. And like Sky, Netflix has built a big business. It has around 150m paying customers, and the analyst consensus is that it will spend around $15bn on content this year, which is more than any of the US incumbents will spend, excluding sports rights.

Like Sky, Netflix has used technology as a platform to build a new TV business. Everything about how it executed that technology has to be good. The apps are good, the streaming and compression are good, the UI is good, the recommendation engine is good, and the customer service and experience are good. The tech has to be good – but, it’s still all about the TV. If Netflix was only showing reruns of Friends and Narcos, no-one would have signed up. It used tech as a platform, and that platform had to be good, but it’s actually a TV company.

I think this framing is important – ‘what kind of questions matter for this business?’ The questions that mattered for   Sky were all TV questions – ‘what happens to football and movie rights?’ – and the same for Netflix. As I look at discussions of Netflix today, all of the questions that matter are TV industry questions. How many shows, in what genres, at what quality level? What budgets? What do the stars earn? Do you go for awards?  How do you interact with Disney? These are not techie questions – they’re generally raised questions. I don’t know the answers – indeed, to be honest I don’t even know the questions.

The more that we see new companies using software to create new businesses in industries outside of technology, the more generally this applies. In particular, I find this a useful way to look at, for example, the explosion of so-called ‘D2C’ – companies that are creating new consumer goods and selling them online ‘directly to consumers’ instead of going through existing retailing channels (at least to begin with). For all of these companies, it’s crucial to execute the online channel properly – the user acquisition model and funnel and browsing and shopping cart and logistics and so on all have to be good. It’s not easy to do this, and we often see legacy, physical retailers struggling. Selling online per se – even selling online really well – is fundamentally a commodity. In other words, how much are we asking ‘tech’ questions? Do we even know what to ask, and who does?

Coming back to TV, there’s an irony here in the fact that the tech industry has spent decades wanting to get into the living room, get into TV, break up the cable bundle and move TV from scheduled linear to on-demand, and yet now that it’s happening, it’s happening in the TV industry, not the tech industry.

Hence, Netflix isn’t using TV to leverage some other business – TV is the business. It’s a TV company. Amazon is using content as a way to leverage its subscription service, Prime,  Amazon is using Lord of the Rings as leverage to get you to buy toilet paper through Prime. But Facebook and Google are not device businesses or subscription businesses. Facebook or Google won’t say ‘don’t cancel your subscription because you’ll lose this TV show’ – there is no subscription. That means the strategic value of TV or music is marginal – it’s marketing, not a lock-in. Apple plans to spend $1bn a year buying content from people in LA, and produce another nice incremental service with some marketing and retention value, or spend $15bn buying content from people in LA, to take on Netflix. But of course, that’s a TV question, not a tech question.

So, do you have an answer to every question you ask on tech, No? Perhaps you can ask us, leave us a reply, we are happy to help!!!

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