Before diving into today’s content, I want to first thank everyone for the overwhelming support thus far. Did not anticipate that this many people would be interested in this topic when I started just a week ago. Also, Against the Current now has a new logo (it’s no longer a thumbnail of my face)! Anyways, let’s dive in.
It’s an early edition! I promised Part 2 would arrive tomorrow but found the time to write today instead. Hope you don’t mind the surprise.
In response to Part 1 of “Beyond ownership”, Sherman (a subscriber) pointed out a key difference between services like Affirm versus AWS, Netflix, and Uber. I think he made a great point and want to emphasize the distinction.
In Affirm’s case, you are amortizing a loan towards eventual ownership. In the case of AWS, Netflix, and Uber, you are paying for temporary access—which obviates ownership altogether. One lowers the friction to owning something. The other removes the need to own anything.
Quite Zen if you think about it, but I don’t think Buddhist philosophy is what motivated the creation of these services.
Over the next few installments of “Beyond ownership”, I will focus—fittingly—on the services that obviate ownership altogether.
Today, we’re exploring how Netflix is amortizing the cost of entertainment.
Netflix
In 2004, Blockbuster had 9,094 locations worldwide. In 2019, there is exactly one left. But I’m not here to tell the tale of how Blockbuster lost. I’m here to tell the story of how Netflix is winning.
Netflix has changed its business model many times throughout the years, starting from DVD rentals by mail (1997) before moving into subscription rentals (1999), and ultimately settling on subscription streaming (2007). Today, you can access an endless library of entertainment for just $11/month.
Netflix subscribers (of which there are nearly 150 million) watch an average of 71 minutes of content on the platform every day. That’s nearly an entire movie’s worth of content each day—300+ movies a year. If we assume that physical DVDs cost $10, you would have to pay over $3,000 to consume the same amount of content you do on Netflix via DVD. This is not to say that Netflix is giving you a good deal (although, they really are), but to illustrate an incredible achievement. By removing the upfront transactional costs of buying individual DVDs (which created friction by forcing consumers to make purchasing decisions), spreading them over monthly installments of $11, Netflix has democratized access to entertainment through amortization.
Today, through its successful endeavor into original content, it now poses a tangible threat to an iconic American neighborhood. Hollywood. From the local DVD store, to Blockbuster, to Hollywood, how has Netflix made its way up the food chain in progressively larger steps?
And, why did Hollywood play ball? Why would production houses give Netflix the rights to distribute their content for pennies on the dollar?
I will caveat this by saying that I was not actually at the negotiation table when the earliest deals happened, but here’s my guess on how it went down:
“Look [insert exec at Paramount Pictures], these movies you own the licenses to—the ones that hit theatres two years ago—how much money are you still making from them? Not very much, I’m guessing? Well, we have a proposition for you. We can help you extend the lifetime value of your biggest hits by 10 - 20%. That’s right. At no risk to you, we’ll give your biggest hits a second life - without you having to do anything.
Today, you spend all of this time making amazing films - a few of which end up creating disproportionate returns. You get a single massive pop at the box office before picking up pennies for the rest of time - and only when people buy your DVDs. Well, in a few years, no one is going to be buying DVDs. Why? Because our technology, which has millions of subscribers, offers consumers the option to get the DVDs they want from the comfort of their living rooms. Streaming is the future of entertainment, and we want your movies to be the poster child of this new era. You make more money for a longer time—how does that sound?”
Put yourself in the position of an executive at Paramount Pictures. Would you be able to resist this proposition—one that could ultimately spell the death of your company?