AudioShocker

I'm a little late to this party, but I'd like to throw in my 2 cents. Earlier in March, a classmate (Trey Trenchard) and I wrote a paper on digital strategy for Prof. Sam Craig's Entertainment/Media/Technology class at Stern. The following two passages are excerpts from the final paper. Our goal was to analyze the challenges, advantages, future landscape, and potential recommendations for Netflix to succeed over the next several years. Though we wrote the paper about Netflix & video content, I think it's also applicable to other industries including publishing and music.

What Channel is This?

Video content distribution is converging to an all-internet accessed world. Signs point to platform agnostic websites distributing video content through personal computers (i.e. Hulu), mobile devices, and most importantly, internet connected TVs. IPTVs are already on the market, and within five years, early adopters and roughly half of the early majority will have started the exodus away from traditional TV watching behavior.

IPTV’s ability to disintermediate parties between the producer and consumer, along with the FCC’s forward-looking agenda of universal access, will hasten its acceptance as well (Ed Note: my partner Trey is a lot more optimistic about Net Neutrality than I am). It is important to recognize that the opportunity to access all video content from a website, on your television, on demand, makes traditional simulcast/broadcast TV completely obsolete. Broadcast and traditional cable TV will not disappear in the near future; however, their cachet will drop substantially.

As we move toward this world, the importance of distributor (TV channel and networks) and producer brands decreases. Today, most consumers do not associate video content with its producer. They do however associate video content with certain TV channels. As this disintermediation occurs, physical channels on a cable box will no longer exist and channel ‘brands’ will slowly die as antiquated groupings of content. Over the past decade, digital video recorders, EPGs, and syndication have already begun to loosen the association between channel and content. There are several key ways that networks create value. In this new world, all of these benefits, with the exception of advertising, will be provided by a subscription video content aggregator. Ad-based distribution will likely be taken over by a market leader such as Hulu, contributing to the complete demise network loyalty and identity.

Creating Value Through Curation

As the online library of content continues to grow (professional & amateur), we can no longer see/read/hear everything. We simply don't have the time or resources to sort through everything ourselves to find what we want, or what we may like. As a result, the ability to curate content is paramount -- and users will be willing to pay for such this service.

Netflix’s curation features need improvement. Its effectiveness in generating accurate recommendations pales in comparison to systems at sites such as Pandora, Last FM, and iTunes (Genius). Being a gateway to online content presents few barriers to entry, however, it is possible to dominate and even create a winner-take-all scenario in this business, like  Google has accomplished with its search engine. What allows Google to command a 65% market share is a marginally better search algorithm. The same is true for Pandora. Even though Last.fm offers a multitude of innovative features, Pandora’s ability to classify sound and automate its curation via an algorithm is responsible for its market leading position.

If Netflix can improve this feature, it will command significant leverage, and can establish itself as the premier destination for online video content. With a sizable lead in this technology, a producer who does not distribute through Netflix risks losing potential viewers. Additionally, Netflix’s curation tool can effectively market the content better than a network or studio can with their small marketing spend, making it more profitable for producers to forgo selling their work to a network or studio, instead retaining the rights and get paid by Netflix per view. (Ed. Note, we are assuming that Netflix continues to expand and invest in the Watch Instantly streaming service / library)

To speed up the process of improving the curation function as quickly as possible, we recommend either creating partnerships with Pandora and/or Google. Partnering with Pandora would give Netflix access to pieces of their curation algorithm and the engineers who have been building this best-of-industry platform. In addition, we recommend Neflix copy the Last.fm “scrobbler” function. The scrobbler methodology archives every piece of musical content one has played on their computer or mobile device and sends this info to Last.fm’s servers. Employing a similar methodology, Netflix could more accurately curate video content by not only recognizing what someone enjoys by telling the program as it does now (active selection), but also recognizing tastes by simply consuming content (passive selection).

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Perhaps we knew this was coming all along, but instead of Netflix we should have find/replaced with Google. Or, perhaps we aren't nearly as prescient as we thought and everyone already knew all of this. Either way, we believe that producer/consumer disintermediation and an increasing demand for curation are important considerations when determining a digital strategy.

Google TV is certainly not the first attempt at 'IPTV', but it is likely to be the most well regarded. The last thing I need is another set-top box, but I excited about IPTV and what is coming next.