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Media and
Entertainment Services Alliance (MESA) Executive Director Martin Porter says
that the entertainment industry is so enamoured with the “Next Big Format” that
it has forgotten to sell and support the one product that can pay the bills. He
says, “A message for Hollywood should come loud and clear from the Blu-Tech
conference in Burbank this December: Don’t mess with the disc!”
A
determination to make life difficult for DVD and Blu-ray seems to be top of the
agenda for some industry executives. That appears to be the only explanation
for the actions of Netflix Founder and CEO Reed Hastings, for example, who
re-branded the profitable and growing US business in packaged media rental and
shed 810,000 customers in less than three months.
In
September, Hastings said, “I messed up,” in an online apology that attracted
almost 30,000 adverse comments. It was another month before he realised exactly
how big that blunder had turned out to be and reversed his decision to rename
the Netflix disc rental arm Qwikster. In a Q3 letter to shareholders published
on Oct. 24, Hastings offered excuses for the decision to impose “significant
DVD-related pricing changes” and promised to “repair the reputation of the
company” but shareholders were not convinced and the share price dropped to
$77.37, far below the mid-year peak of $298.73.
The
company went up the blind alley of re-branding the moneymaking arm of the
business, when the Netflix name has been synonymous with packaged media rental
for many years. To misquote an overused saying, “Don’t they know there’s a
format war on?”
The
nature of the competition between physical and digital distribution is often
misunderstood. Discs are tangible and marked clearly as Blu-ray or DVD.
Streaming video is an intangible flow of data that is meaningless without the
appropriate device and software to decode it. Like bottled water, the disc is a
premium, packaged product delivered in a single unit to wherever you need it.
Streaming video is the tap water of entertainment: anonymous and plentiful but
only consumable when connected to a free-flowing and pure source of supply. If
it is reduced to a drip or in any way contaminated, it becomes unusable.
Although
the pipes for online video are opening up slowly, packaged media still is by
far the most popular and profitable source of home video. Just open the box,
take out the disc and drink in the entertainment.
It is a
little more difficult if you choose to view online. Few viewers know or care
what a codec is until they discover that they haven’t got one. The only visible
consequence is a blank screen and perhaps a message saying “Cannot play media.
Please download the correct version.” In the worst case, such as the lack of
Adobe Flash on certain Apple devices, there is no solution. “Can’t play, won’t
play” is the unpalatable message on the screen.
Unlike an
unplayable disc, which can be rapidly returned to the retailer and replaced,
nobody logs the silent scream at the blank screen when online entertainment
fails to play. On the one side is the easily understood and standards-based
optical disc, on the other is a plethora of incompatibilities.
When
HD-DVD and Blu-ray went head-to-head, the almost identical discs produced
indistinguishable HD images and the struggle came down to the simplest of
equations: the format backer with the deepest pockets wins. Digital delivery is
very different. Dozens of proprietary systems abound and esoteric arguments
about image quality and different encoding systems keep the boffins happy.
For some
digital content distributors, the fact that your video is unplayable on other
systems is the only game plan: viewers drink from their fountain or not at all.
There are no such problems with the disc, which can be played almost anywhere
and remains the entertainment platform of choice for millions of consumers.
Netflix
straddled both worlds confidently until earlier this year and the figures
provided in the company’s Q3 investor report reveal that the total number of US
subscribers in the quarter was an impressive 23.8 million. Of this number,
58.6% took the DVD rental service and all but 10% subscribed to streaming
video. These numbers hint at the reason behind the decision to split disc and
streaming subscriptions, although the decision to re-brand remains
incomprehensible. Most Netflix customers do not make a binary choice between
one format and the other: streaming and playing discs are not an incompatible
combination.
The
decision to charge $7.99 for each service instead of $9.99 for both, led
810,000 subscribers to walk away from Netflix and the move upset even the 13.93
million DVD subscribers who chose to remain with the company. The company still
gained 4.7 million new subscribers in the 12 months to the end of September, a
20% year-on-year growth rate. Given that the profit contribution from its US
domestic operation is up 68% on the previous year, the share price fall seems a
little excessive.
Despite
its relative success in the US market, international ventures have not proved
to be money spinners for Netflix and the company’s planned arrival in the UK
and Ireland next year will have to be better managed than the excursions north
and south of the US border.
The data
rate caps that have led to expensive broadband surcharges for subscribers have
tarnished the 10% market penetration that Netflix has achieved in Canada, with
one million households signed up so far. The nascent Latin American operation
has yet to prove itself although on paper it just about breaks even. If the
company expects an easy ride when it arrives in the UK, it is likely to be
disappointed.
This
market is not like the “wide open spaces” of the Americas. Branches of HMV,
Tesco, Morrisons and Asda are among other DVD outlets within easy reach of a
large part of the population, and an efficient 24-hour parcels network brings
discs to the door. The broadband network is patchy with one of the largest
high-speed networks owned by Virgin, and Sky Movies holds rights to first-run
pay window from all the majors.
And there
is the incumbent Lovefilm, now with the strength of Amazon to back up its
offer.
Hastings
says that it might take more than two years for Netflix to reach profitability
in the UK and that could well be an underestimate. One thing is certain
however: if Netflix attempts to compete in the UK streaming video market
without a solid offer in packaged media to underpin its operation, it could
find it very hard to establish a significant presence.
Perhaps
Netflix should heed the advice given by Porter: “Don’t mess with the disc!”
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