September 22, 2011

Hey, watch this!

Netflix beat Blockbuster the same way Amazon and Walmart beat their competition: supply chain mastery. Distributing physical things is that difficult. Inventory control is what ultimately did in Borders. Now Netflix is trying to compete in the same market as Apple and Amazon using the same Internet as everybody else.

But Netflix convinced itself that its physical supply chain was an albatross around its corporate neck. Even if it was spinning off the DVD division to sell it at a later date, the mystery is why it would destroy the brand now ("Qwikster"?) before any deal is done. PC Magazine has already added Netflix to its pantheon of tech debacles.

An obvious comparison is the Kindle. Amazon sees a big future in ebooks. It's built an entire publishing platform based on ebooks. But it isn't about to spin off its physical supply chain (call it "Bookster"). When launching the Kindle, Amazon could augment the still-slender Kindle catalog with its deeper catalog of physical books.

What does Amazon do with excess capacity in its supply chain? Amazon sublets it, even if that means competing against itself. It doesn't care as long as it gets a cut of the action.

As I mentioned before, Netflix no longer has the deepest anime catalog on the Internet, the only reason I signed up with them in the first place. But Netflix has what niche competitors like Greencine lack—a nationwide supply chain. Why not sublet that excess capacity to any other renter of "First-sale doctrine" IP materials?

In any case, had Netflix just nailed down a bunch of long-term licensing agreements with the major IP owners and the owners of the pipes all that data has to travel through, that'd be one thing. But with Starz still holding out, Netflix is negotiating from a position of weakness while kicking the business that brought it this far to the curb.

Like a hormone-addled teenager, it's as if Netflix CEO Reed Hastings thinks he can impress all those disenchanted subscribers and cute content providers who keep blowing him off by doing something as arrogantly grandiose as it is self-destructive. Hey, watch this! Or in the immortal words of Otter from Animal House:

No, I think we have to go all out. I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part!

And they were just the ones to do it. Of course, such demonstrations of desperate determination often end with a trip to the hospital. Or bankruptcy court.

Related posts

Netflix flak
Blockbuster goes bankrupt

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# posted by Anonymous Dan
9/22/2011 3:13 PM   
Great insight, Eugene. What Hastings cannot accept, or at least publicly admit, is it is only the DVD business and the ability to bundle that option with streaming that gives his company a competitive advantage. The law is on his side for mailing physical DVDs and his company did it very well. The law actually hurts NetFlix in the streaming market.

But the DVD business does not justify a company with a $300 stock price. Neither does the streaming business but the growth trend of that sector allows management to pretend it could for longer.
# posted by Blogger Joe
9/23/2011 11:19 AM   
After moving, I decided to not get satellite or cable and go with NetFlix and Hulu Plus. I even bought a blu-ray player that supports both (it's a Sony and otherwise kind of stinks.) On closer checking, I discovered that the streaming offerings from both are very limited. I was going to go with NetFlix DVD, but now I'll just wait while I finish watching Highlander with Alyssa (we're in the middle of season 3.)

I should add that however screwed up NetFlix is, the networks and movie studios are worse. They are locked into the "old" way of doing business--to the point of selling blu-rays for $29. They have astonishingly little vision in part because they (and the various unions) are more concerned about maximizing bucks than in making some profit while entertaining people.

That said, I do think they are beginning, just beginning, to clue in that the long term deals the studios/networks signed with cable, satellite providers and NetFlix (and iTunes) were awful. I am absolutely amazed how how clueless studios and book publishers are and because of this ignorance, how much sovereignty they surrender to the electronic providers.