February 21, 2017

Closing the Gap

I’ve been thinking a lot this week about the relationship between Netflix and the traditional broadcast networks. Netflix has had an amazing run over the past ten years, rising from its humble DVD-by-mail roots to become the preeminent broadband video streaming service in the world. Ten years is a long time, though, and the more I think about it, the more I think the Netflix era of dominance is coming to a close.

Why is this happening and what does it mean for the future of TV? A couple of thoughts.

1. Netflix Once Enjoyed Multiple Early-Mover Advantages, Not Just Original Content.
Sustainable strategic advantage comes from having a unique combination of elements that are difficult or time-consuming for competitors to copy. The most powerful and long-lasting combinations often include elements of both the product and the manner in which the product is delivered. Common business school examples include Southwest Airlines and its low cost point-to-point airline model; Wal-Mart and its early use of big data to integrate its supply chain in order to lower prices; and McDonalds, with its use of franchising and a nationwide supply chain to provide standardized quality in fast food.

Today, Netflix is known mainly for its lineup of original shows, but its success was built on a wider set of advantages.

First, Netflix was the first premium broadband video provider to ship pre-loaded apps on connected TV devices. (YouTube was often there as well, but without the long-form premium content.) Seven years ago, if you wanted to watch a TV show on your Xbox or smart TV, Netflix was often the only real option. As a result, the company was early to develop an infrastructure that could support HD (1080p) streaming and deliver ‘living room’ quality to larger screens.

Second, Netflix exploited its early position to develop a best-in-class user interface dramatically different than the traditional MVPD grid guide.

Third, before legacy networks truly understood the implications, Netflix negotiated licenses to distribute entire prior seasons of TV shows within a new (subscription-based) on-demand window, making Netflix a one-stop shop for any time, any content (or quantum) viewing.

Fourth, Netflix mined its growing data reservoir to deliver a more personalized viewing experience that remembers what you’ve watched and makes it easy to watch more.

Fifth, Netflix realized early on that serial TV dramas (not movies) were the real key to on-demand video viewing. Rather than choosing each new piece of content from scratch, today’s shows allow the on-demand viewer to make one decision up front and then simply start at the beginning and consume the episodes in sequence at whatever pace they desire. In other words, Netflix popularized what we now know as ‘binge viewing.’

Finally, using the data collected from its growing user base, Netflix created TV series that it was mathematically certain viewers would watch (most famously, House of Cards). And in droves they did, and Netflix quickly evolved from a mere conduit to a high-quality content creator. As TDG observed even before House of Cards was released, Netflix’s real competition is HBO, not other streaming video purveyors.

2. Broadcaster TVE Apps Have Closed the Gap.
Many of the elements that Netflix pioneered are now part and parcel of the broadband video industry as a whole. For example, the Big-4 TV networks (ABC, CBS, NBC, and Fox) have apps on about every leading broadband TV device platform. Unfortunately for Netflix, TV apps have commoditized, meaning the loss of a key competitive advantage, as it is no longer the only one with ‘shelf space’ on the home screen of these connected devices. As importantly, the user experience of these apps has standardized and converged. The generic HD video streaming experience today, for example, is very good across the board with no real consistently noticeable differences between providers. (Netflix obviously still leads with respect to support for 4K.) The UI differences that remain are often larger between platforms (i.e., Netflix on Apple TV vs. Netflix on Roku) than they are between providers (i.e., Netflix vs. NBC on Apple TV). As a result, apps from legacy providers like NBC are every bit as slick and easy-to-use as anything from Netflix.

Yet another example of Netflix losing key early advantages is the fact that legacy providers have adapted their shows to the online environment. Nearly all new TV shows are serialized, with the standalone episode having gone the way of the dodo bird. Legacy providers typically post new shows weekly as they air on live linear (rather than all at once), but once posted that distinction evaporates. All episodes are numbered and organized the same. With respect to a show I haven’t seen yet, my ability to start from episode one and binge away on the ABC or NBC app is now essentially identical to Netflix. Finally, with respect to the shows themselves, legacy providers have evolved and upped their game. Personally, I’ve been watching NBC’s Timeless and have to admit that it’s started to grow on me. The writing is clever and the costumes and visual effects are consistently well done. Sure, the time travel trope is cliché, but is that so different than all of the superhero shows on Netflix?

Of course, it’s also important to note that legacy providers have wised up with respect to their content licensing policies. Netflix is no longer able to cherry pick successful shows at bargain-basement prices, and current seasons (which drive the lion’s share of viewing) are available only from the legacy providers’ own apps. This, along with Netflix’s own focus on developing original programming, means that it has clearly moved from a one-stop-shop (i.e., an aggregator) to primarily an original content brand.

The bottom line: the combination of advantages that Netflix once had is largely gone. Today’s TVE apps are every bit as good as Netflix. The only real remaining differences between Netflix and TVE are the content and the business model, and I’m not sure either really redounds to Netflix’s advantage.

3. There is Room for Both Subscriptions and Ads.
First, as discussed above, Netflix certainly doesn’t have a monopoly on good writing or acting. TV thrives on diversity, and it’s hard to see how having multiple, successful apps can be anything but good for overall quality. Second, and equally important, most broadband providers are now providing a skinny bundle that includes the broadcast channels for more-or-less the same price as standalone broadband (which is obviously necessary in order to watch Netflix). A number of these packages (including mine) even include HBO. As a result, TVE authentication for the major broadcast network TVE apps (and sometimes even premium apps like HBO Go) is essentially free for most broadband households, regardless of whether they are traditional pay-TV fans or Cord Whatevers. This means the choice between Netflix and this core set of TVE apps boils down to paying an additional monthly fee for content versus watching ads. (Bundled HBO Go is obviously the best of both worlds because it feels free and it’s ad free, which is a no-brainer for just about anybody). Here, I think viewers are more flexible than some people think. Yes, it’s nice to have some ad-free subscription content available, but it’s also nice to have a big library of current, high-quality shows available without seeing a monthly charge on the credit card statement.

Netflix once had a giant lead over legacy TV providers with respect to the streaming video experience. Slowly but surely, the big broadcast brands have closed the gap. Going forward, today’s TVE apps have a real opportunity to take viewing share back from Netflix. Let’s see if they can capitalize.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to technology start ups. He lives near Seattle, WA.

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