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When I read Erik Kain’s post yesterday about how the Ouya has essentially failed, my immediate response was “well, of course, the video game industry is drawing dead.” Let me explain what I mean.

When technological innovation leads to a new product class that catches in, there is an initial phase called the adoption phase which is characterized by large and rapid growth, continued innovation, and something of a mania around the product and industry. We saw that with video games in the ’90s.

But when an industry becomes mature, sales plateau as the product becomes a more banal part of everyday life and the mania generally declines. This can sometimes be wrenching for an industry, especially since what worked before no longer works now. They may fail to realize that no amount of innovation can change the total magnitude of the industry relative to life in general, just compete within the bounds of that magnitude. Firms whose models were built implicitly around a continuation of the adoption phase will fail.

To give you a concrete example, here’s car sales per thousand souls in the US since Ted Turner bought the Braves:

fredgraph

Beyond the extreme sensistivity to business cycles, what you see is that, despite the fact that the quality improvements in American cars since the days of Nader’s Raiders has been extraordinary in safety, comfort, fuel efficiency, pollution mitigation, and other cool accessory features, it hasn’t convinced Americans to buy more car overall. This pattern is clearly taking hold in the video game industry:

Screen Shot 2014-03-08 at 8.00.29 AM

Now, let’s be a little clear here – mobile gaming has done a lot for the category of industry we’re calling “video games.” But that’s because it expanded the boundary of what video games were, not because it convinced people to spend more time playing what, up through 2007-08, we referred to as “video games.” My mother plays plenty of Candy Crush Amazing Epic Super Saga: Incredible Journey of Candy Gilgamesh or whatever but that hasn’t convinced her to take up Halo (though the image of my mother pwning and trash-talking on XBox Live is pretty hilarious). In a sense, this growth is illusory insofar as you are considering the growth of console and PC gaming. That’s really clear when you look at this:

Screen Shot 2014-03-08 at 8.00.56 AM

Video games, methinks, have entered the phase in their life where they are no longer stealing American hours from other activities; indeed, if anything, the rise of Netflix, board games, and some backlash against video games probably means equilibrium per-capita video game hours will end up settling at a lower number than they currently are. The Ouya was implicitly premised on the idea that it wasn’t competing with existing consoles; it wasn’t doing what they were doing better or differently, it was trying to convince people to do something new. But for most people, if they weren’t playing video games, they were just doing something else. The Ouya was drawing dead because video games are drawing dead. That doesn’t mean the industry is going to implode; it just means its moved on to fierce competition for limited market share rather than explosive overall growth.

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so tell them haters cut it out like a coupon

Some businesses sell stuff a la carte; in fact, most do. You offer a number of thingamabobs for sale of varying quality and price, and hopefully enough people buy enough thingamabob that revenues exceed costs. There’s nothing wrong with this model, exactly; but if I were starting a business today, it wouldn’t be what I do.

I would try to turn customers into bonds.

Bonds, from an investor’s perspective, have key desirable properties – they offer regular, predictable, reliable payments. If you own a portfolio of solid bonds, barring a large and sweeping crisis, you can probably plan confidently for a large chunk of future.

For a company, then, if they can turn your unpredictable, lumpy purchases into a steady stream of predictable income, they also gain similarly. Many, if not most, of the businesses that have come to define the modern landscape do exactly this.

The obvious answer is Netflix, but in that realm there is also Hulu and Redbox; in music, Pandora, Spotify, and Grooveshark want you to subscribe. Amazon has Prime, and also individual product subscriptions, and also owns Audible, which wants you to subscribe to audiobooks. Dropbox is a must, and plenty of people subscribe to Evernote Premium as well. Feedly does it, as does Instapaper. LinkedIn does it. Zipcar and Car2Go want you to pay monthly for access. Apple, the king of a la carte selling, has iCloud. Shoot, even my local bikeshare system wants me to subscribe. And this says nothing about your friendly neighborhood broadband and cellular providers.

This isn’t earthshaking, exactly, but it’s worth examining why this model is taking off. It’s not new – it’s how newspapers and magazines, ironically, have stayed afloat for decades and now can’t seem to continue as free content floods the intertubes. But there are key reasons that now is the The Big Moment for subscriptions. Credit and debit cards are a big one – everybody has them, everybody uses them all the time. The internet is another, both from the consumer and producer standpoint. And these combine to produce interesting effects. Essentially, these services can give you the satisfying illusion of freeness – after the first instance, you never have to perform the act of payment again. Even if I only watch 3-4 Netflix movies a month, somehow it feels much more painful to individually rent those movies from Blockbuster, Vudu, iTunes, etc then it does to just watch them on Netflix. There are also concrete upsides, of course, like freeing oneself from the mental grip of the sunk cost fallacy – if you paid $5 to rent a movie that turns out to suck, you’re going to hold out a lot longer then if you just clicked it on Netflix.

The model also makes sense because so many of the firms I listed above have high fixed costs but low marginal costs, meaning that precisely metering access isn’t profit-maximizing. It’s also why many of them can so liberally give away sample service or even permanent not-quite-premium service to so many people.

There is also the bank-shot variation of this model, where you give it all away to  “customers” who then provide you with a steady, reliable stream of eyeballs, and then you sell those eyeballs to advertisers. I will not patronize you by listing the beneficiaries of this model.

These models have the downsides, compared to actual bonds, of being less reliable and predictable relative to actual bonds:

aol-netflix-march2013

Note both the brief stagnation and even decline of Netflix subscribers in the Qwikster-House of Cards interregnum; also note the large, secular decline of people paying monthly for crappy email and browser services.

But if you can make it work as a business, this model offers huge advantages over the boring old-school model of just selling unit-by-unit stuff; for the consumer, it remains to be seen. God knows I am paying a startling share of my income in monthly subscriptions, and certainly it feels more painless then it would to buy a lot of this stuff unit-by-unit; but is it actually saving me money, or just mental anguish? And is saving the latter worth spending the former?

Concluding note: I was surprised to learn yesterday that a business idea I pitched to Mrs. Rooted yesterday turned out to totally already exist and be called Tile; the one difference, of course, is that I pitched it as a subscription service whereas Tile is a la carte. Hmmm…

i'm from the government and i'm here to ZOMG RED POINTY DOT

Kevin Drum on Netflix:

What I wonder is what happens when Netflix eventually drops the disc-by-mail service that gave it its start. That’s inevitable, isn’t it? And when it happens, it will mean there’s really no place left to find a large selection of older movies to watch. The old brick-and-mortar stores will be gone, driven out of business by Netflix, and thanks to licensing wars, no streaming service will be available with a broad selection. People like me will actually be worse off than we were a decade ago.

First of all, I’m not certain this is true. Just because a movie’s not on Netflix doesn’t mean it’s not available for streaming. I challenge Kevin to find a movie that he could not instantly summon using canistream.it – which, BTW, may be the finest internet site of all time. He will find some, I’m sure. Just not many! And most of the ones he couldn’t find would be flicks he’d’ve been hard-pressed to find at any brick-and-mortar store ten years ago, that’s for sure.

Secondly, you could download things illegally. Just saying.

But lastly, for those of you who both want lots of movies digitally on-demand but don’t want to be lawless swashbuckling pirates, there is an obvious policy option – eminent domain! Just have the government take possession of every single American film made before, say, 1960, and then license them for a fee sufficient to fund their upkeep. It will be a one-time payment of a couple billion dollars, sure, but it will ensure that America’s cultural treasures are preserved and widely accessible. If you want to save the money you could even, say, revise America’s insane copyright laws.

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