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Starz and Showtime recently announced that several hit shows such as Dexter would not be available for instant download on Netflix due to fears of declining DVD revenues.  Whether it makes sense or not, physical products, like DVDs, can command higher prices than non-physical digital versions.  To better understand this concept, all one has to do is look at the Craigslist business model vs. the newspaper classified business model.  Billions of annual dollars in revenue were lost when classified ads went from physical print to digital bits.

Netflix

It appears that Hollywood’s business model is to slow the digitization of movies as long as possible rather than embracing the newer technology.  It is unfortunate that Hollywood is putting its efforts into fighting the technology vs. leveraging it.  At the same time, Netflix is not standing still with its business model.

Netflix recently outbid HBO and Showtime for the Kevin Spacey series House of Cards, which will only be available through Netflix. Currently, there is no word from the company whether the series will be available on DVD via mail only or as an instant download.  I commend Netflix for this bold move.  Netflix is attempting to lead the technological revolution instead of fight it.  On the other hand, if Netflix chooses to make the series available by mail with slow release of the digital download, they are simply competing with Hollywood using the same tired business model.  Hopefully, Netflix will take the bold action of making House of Cards available ONLY through digital download.  This move has the ability to change the way we view television — rather than viewers conforming to network schedules, viewers would now be able to watch television on-demand.

Despite the company’s current standing, Netflix will be experiencing some business model issues of their own in the upcoming years, as DVD becomes the next version of 8-track tapes.  How many more years will it make sense to physically ship DVDs vs. download them?  With this bold move Netflix is playing both angles: will the power be concentrated on the content providers and studios, or will the power be concentrated with the content deliverers?  Conventional wisdom says “content is king,” so the content creators will rule.  However, there are many industries where the company with access to the consumer controls the relationship and commands the lion’s share of the profits.

  • Wal-Mart and Best Buy make far more money than the manufacturers of products they sell
  • A farmer spends years tending cattle to produce a steak, but Ruth's Chris steak house makes far more simply cooking it
  • Book publishers make more than the authors

With this new series, Netflix is dramatically altering its business model to become a content creator.  In effect, they are becoming a miniature version of networks like ABC, NBC, and CBS who create and distribute content. The only difference is Netflix delivers the content via web, iPad, Wii and TiVo vs. broadcast.  It will be interesting to see how this experiment plays out… stay tuned…