by Adam Hartung | Apr 21, 2016 | In the Rapids, Leadership, Lifecycle, Television, Web/Tech
Netflix has been a remarkable company. Because it has accomplished something almost no company has ever done. It changed its business model, leading to new growth and higher profits.
Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail. Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market. Consider Circuit City, that lost enough customers to Amazon it could no longer survive. Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators? These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.
Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video. By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount. By 2010 Blockbuster was bankrupt. Netflix’ share price soared from $50/share to almost $300/share during 2011. By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding. People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.
But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business. The shares soared, recovering all that lost value. By 2015 the company had more than doubled its previous high valuation.
But Netflix may be breaking entirely new ground in 2016. It is becoming a market leader in original programming. Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.
Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming. Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours. Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.) But that was long ago.
These days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events. Sports are far cheaper to program, and can fill a lot of hours. Next think reality programming. Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets. It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.) Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.
Against that backdrop, Netflix has announced it will program 600 hours of original programming this year. That will approximately double any single large broadcast network. In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program. Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.
When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.
To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services. 29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best. Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.
So a decade ago Netflix was a CD distribution company. The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes. Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world. And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows. Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.
by Adam Hartung | Jul 10, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Television
Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012. Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations. Oh my, some people just never learn.
The media industry is now over a decade into a significant shift. Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news. The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed. Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)
Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact. And leadership still seems unable to understand future scenarios that will be far different from today.
In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales. Classified ads represented about a third of newspaper revenues, and 40% of profits. Simultaneously display advertising for newspapers was considered a cash cow. Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings. Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.
So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times. Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers. Craigslist, eBay and other user sites killed the market for classified ads. Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads.
These web sites all existed before the acquisition, but Tribune leadership ignored the trend. As one company executive said to me "CraigsList!! You think that's competition for a newspaper? Craigslist is for hookers! Nobody would ever put a job listing on Craigslist." Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.
The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid. Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.
Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company. Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers. Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets. He added a few billion dollars more debt to Tribune. By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.
Now, new leadership has control of Tribune. They are splitting the company in two, seperating the print and broadcast businesses. The hope is to sell the newspapers, for which they believe there are 40 potential buyers. Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear. But hope springs eternal!
The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.
Let's see, what's the market trend in entertainment and news? Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet. Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.
A long time ago content was controlled by distribution. There was no reason to create news stories or radio programs or video unless you had access to distribution. Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.
But today distribution is free, and everywhere. Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high. Today the value is in the content, not distribution.
In the last 2 years the number of homes without a classical TV connection (the cable) has doubled. Sure, it's only 5% of homes now. But the trend is pretty clear. Even homes that have cable are increasingly not watching it as they turn to more and more streaming video. Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.
While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear. The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources. And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism.
Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future. Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships. It's a big, dumb bet. Similar to overpaying for Times-Mirror. Some leaders just seem destined to never learn.
by Adam Hartung | Sep 2, 2010 | Current Affairs, Defend & Extend, In the Rapids, Television, Web/Tech
Summary:
- Market shifts create losers, and winners
- Demand doesn’t decline, it just changes form – and usually grows!
- We want more entertainment and communcation – but not the old fashioned way
- Losers keep trying to sell what they have, and know
- Winners supply solutions aligned with market needs regardless of old competencies
How would you react if your customers said your product really wasn’t something they needed? Would you work hard to convince them they are wrong? Maybe try to add some features hoping it would regain their attention? Or would you start looking for what they really do need/want?
Pew Research Center, at PewSocialTrends.org headlines “The Fading Glory of the Television and Telephone” describing how quickly people are walking away from what were very recently considered absolute necessities. As a “boomer” and member of the “TV generation” I was surprised to read that only 42% of Americans now think a television is a necessity! This has been a rapid, dramatic decline from 52% last year and 64% in 2006! 1 in 5 Americans have changed their point of view about television as a necessity in just 4 years! And TV as a necessity is in an accelerating decline! I can remember when my generation went from 1 TV in the house to 1 in every room! This trend does not bode well for broadcast television networks, affiliates, advertisers, traditional production companies, television newscasters, manufacturers of TV sets and TV equipment – or many other businesses linked to TV as we know it.
Simultaneously, demand for a land line telephone has declined. Again, my generation remembers the days with one phone in the house – in some areas on a shared “party” line where multiple families shared a single phone line. The phone was in a central area so it could be shared. In the 1970s we saw things change as telephones were added to every room! Now, according to Pew, folks who consider a land-line phone a necessity has declined to only 62%, a 10% decline from just last year (68 to 62) and barely 3 in 5 Americans! Wow!
Of course, for every decline there’s a winner. 47% see the cell phone as a necessity – that’s 5 percentage points greater than the TV score, indicating mobile phones are seen as more of a necessity than television by the general population. And 34% see high speed internet as a necessity – only 9 percentage points fewer than the TV number – and more than half who see the need for a land-line phone.
Demand for entertainment and communication have not declined! If you are in television or land lines you might think so. Rather, that demand is accelerating. But it is just shifting to a different solution. Instead of the old technology, and supplier industry, people are changing to something new. First with video cassetttes, then digital video recorders (DVRs), then the plethora of available cable channels and on-demand TV, and now with on-line entertainment from YouTube to Hulu people have been changing the way they consume entertainment. Demand has gone up, but not from traditional consumption of TV, especially as viewing has switched from the TV to the computer monitor – or the hand held device.
Clearly, access to the internet (facebook, twitter, et.al.), texting and anytime/anywhere calling has increased both our access and use of one-way (such as reading web pages) and two way communication. Communication is continuing to grow, but it will be in a different way. No longer do we need a “dial tone” to communicate – and in most instances people are finding a preference to asynchronous rather than real-time communication.
These are the kind of industry transitions that threaten so many businesses. What Clayton Christensen calls “The Innovator’s Dilemma” as new solutions increase demand while making old solutions obsolete. The tendency is for the supplier of traditional solutions to say “my market is in decline.” But really, the market is growing! Just like Kodak said the demand for film was declining, when demand for photography – now in digital format – was (and is) escalating! When market shifts happen, incumbents have to resist the temptation to try “keeping” the “old customers” by undertaking Defend & Extend efforts – like adding features and functionality, while cutting price. This inevitably leads to disaster! Instead, they have to understand the shift is only going to accelerate, and develop an approach to entering the new market.
As this research comes out, Apple launched a series of new products to augment its set-top box and iPod/iTouch product lines. (San Francisco Chronicle, SFGate.com “Steve JobsUnveils Upgraded Apple TV, New iPods“) by doing so Apple recognizes that people still want entertainment – but they are a whole lot less likely to accept sitting in front of a communal television, serially deploying programming at them. They want their entertainment to be on-demand, and personalized. Why should we all watch the same thing? And why watch what some programmer at CBS, HBO or TMC wants to deliver?
Apple is bringing out products that align with the direction the market is now heading. Ping is designed to help people share program information and identify the entertainment you would like to receive. iTunes is upgrading to bring you in bite-size chunks exactly the entertainment you want, as you want it, aurally or visually. These are products which will grow because they are aligned with what the market says it wants — even more entertainment. Those who are hidebound to the old supply mechanism will simply find themselves fighting for declining revenue as demand shifts – and grows – in the new solutions
