Can Netflix Double Pivot to Be a Media Game Changer?

Can Netflix Double Pivot to Be a Media Game Changer?

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.

Netflix Original ProgrammingThese 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.

 

How Cable TV is Deaf to the Market Roar of Change

How Cable TV is Deaf to the Market Roar of Change

Do you really think in 2020 you’ll watch television the way people did in the 1960s?  I would doubt it.

In today’s world if you want entertainment you have a plethora of ways to download or live stream exactly what you want, when you want, from companies like Netflix, Hulu, Pandora, Spotify, Streamhunter, Viewster and TVWeb.  Why would you even want someone else to program you entertainment if you can get it yourself?

Additionally, we increasingly live in a world unaccepting of one-way communication.  We want to not only receive what entertains us, but share it with others, comment on it and give real-time feedback.  The days when we willingly accepted having information thrust at us are quickly dissipating as we demand interactivity with what comes across our screen – regardless of size.

These 2 big trends (what I want, when I want; and 2-way over 1-way) have already changed the way we accept entertaining.  We use USB drives and smartphones to provide static information.  DVDs are nearly obsolete.  And we demand 24×7 mobile for everything dynamic.

Yet, the CEO of Charter Cable company wass surprised to learn that the growth in cable-only customers is greater than the growth of video customers.  Really?

It was about 3 years ago when my college son said he needed broadband access to his apartment, but he didn’t want any TV.  He commented that he and his 3 roommates didn’t have any televisions any more. They watched entertainment and gamed on screens around his apartment connected to various devices.  He never watched live TV.  Instead they downloaded their favorite programs to watch between (or along with) gaming sessions, picked up the news from live web sites (more current and accurate he said) and for sports they either bought live streams or went to a local bar.

To save money he contacted Comcast and said he wanted the premier internet broadband service.  Even business-level service.  But he didn’t want TV.  Comcast told him it was impossible. If he wanted internet he had to buy TV.  “That’s really, really stupid” was the way he explained it to me. “Why do I have to buy something I don’t want at all to get what I really, really want?”

Then, last year, I helped a friend move.  As a favor I volunteered to return her cable box to Comcast, since there was a facility near my home.  I dreaded my volunteerism when I arrived at Comcast, because there were about 30 people in line.  But, I was committed, so I waited.

The next half-hour was amazingly instructive.  One after another people walked up to the window and said they were having problems paying their bills, or that they had trouble with their devices, or wanted a change in service.  And one after the other they said “I don’t really want TV, just internet, so how cheaply can I get it?”

These were not busy college students, or sophisticated managers.  These were every day people, most of whom were having some sort of trouble coming up with the monthly money for their Comcast bill.  They didn’t mind handing back the cable box with TV service, but they were loath to give up broadband internet access.

Again and again I listened as the patient Comcast people explained that internet-only service was not available in Chicagoland.  People had to buy a TV package to obtain broad-band internet. It was force-feeding a product people really didn’t want.  Sort of like making them buy an entree in order to buy desert.

As I retold this story my friends told me several stories about people who banned together in apartments to buy one Comcast service.  They would buy a high-powered router, maybe with sub-routers, and spread that signal across several apartments.  Sometimes this was done in dense housing divisions and condos.  These folks cut the cost for internet to a fraction of what Comcast charged, and were happy to live without “TV.”

But that is just the beginning of the market shift which will likely gut cable companies.  These customers will eventually hunt down internet service from an alternative supplier, like the old phone company  or AT&T.  Some will give up on old screens, and just use their mobile device, abandoning large monitors.  Some will power entertainment to their larger screens (or speakers) by mobile bluetooth, or by turning their mobile device into a “hotspot.”

And, eventually, we will all have wireless for free – or nearly so.  Google has started running fiber cable in cities including Austin, TX, Kansas City, MO and Provo, Utah.  Anyone who doesn’t see this becoming city-wide wireless has their eyes very tightly closed.  From Albuquerque, NM to Ponca City, OK to Mountain View, CA (courtesy of Google) cities already have free city-wide wireless broadband. And bigger cities like Los Angeles and Chicago are trying to set up free wireless infrastructure.

And if the USA ever invests in another big “public works infrastructure” program will it be to rebuild the old bridges and roads?  Or is it inevitable that someone will push through a national bill to connect everyone wirelessly – like we did to build highways and the first broadcast TV.

So, what will Charter and Comcast sell customers then?

It is very, very easy today to end up with a $300/month bill from a major cable provider.  Install 3 HD (high definition) sets in your home, buy into the premium movie packages, perhaps one sports network and high speed internet and before you know it you’ve agreed to spend more on cable service than you do on home insurance.  Or your car payment.  Once customers have the ability to bypass that “cable cost” the incentive is already intensive to “cut the cord” and set that supplier free.

Yet, the cable companies really don’t seem to see it.  They remain unimpressed at how much customers dislike their service. And respond very slowly despite how much customers complain about slow internet speeds.  And even worse, customer incredulous outcries when the cable company slows down access (or cuts it) to streaming entertainment or video downloads are left unheeded.

Cable companies say the problem is “content.”  So they want better “programming.”  And Comcast has gone so far as to buy NBC/Universal so they can spend a LOT more money on programming.  Even as advertising dollars are dropping faster than the market share of old-fashioned broadcast channels.

Blaming content flies in the face of the major trends.  There is no shortage of content today.  We can find all the content we want globally, from millions of web sites.  For entertainment we have thousands of options, from shows and movies we can buy to what is for free (don’t forget the hours of fun on YouTube!)

It’s not “quality programming” which cable needs.  That just reflects industry deafness to the roar of a market shift.  In short order, cable companies will lack a reason to exist.  Like land-line phones, Philco radios and those old TV antennas outside, there simply won’t be a need for cable boxes in your home.

Too often business leaders become deaf to big trends.  They are so busy executing on an old success formula, looking for reasons to defend & extend it, that they fail to evaluate its relevancy.  Rather than listen to market shifts, and embrace the need for change, they turn a deaf ear and keep doing what they’ve always done – a little better, with a little more of the same product (do you really want 650 cable channels?,) perhaps a little faster and always seeking a way to do it cheaper – even if the monthly bill somehow keeps going up.

But execution makes no difference when you’re basic value proposition becomes obsolete.  And that’s how companies end up like Kodak, Smith-Corona, Blackberry, Hostess, Continental Bus Lines and pretty soon Charter and Comcast.

 

Some Leaders Never Learn – Tribune’s Big, Dumb Bet

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.