Reversal of Fortune

Reversal of fortune is a term competitive eaters use to describe a bad day; polite society calls it biting off more than you can swallow. It’s a term becoming unfortunately linked with Netflix, whose “Team” has sent customers a series of emails detailing price increases and the creation of a separate DVD/Blu-ray by mail service called Qwikster. Netflix has now reversed course, and like Coke before it, has killed “New Netflix” and returned to “Classic Netflix.”

Qwikster, the stand-alone DVD/Blu-ray rent-by-mail business has now officially been relegated to those lists of “Top 10 Business Mistakes.” In fairness to Netflix, Qwikster actually made some sense. Wall Street would eventually show its dislike for entertainment businesses with a physical component (see Blockbuster). As their ongoing global expansion continues, Netflix is poised to become a streaming video company. Our expanding use of connected devices will inevitably usher in a new age of acquiring and watching movies and TV shows, so when Netflix separated physical discs from digital rentals, they appeared to position themselves for the future.

The problem is that future is still a few years away. American consumers continue to watch a lot of movies on DVD and Blu-ray. By separating their physical and digital businesses, Netflix strayed from its foundation — a deep catalog of movie titles, accompanied by today’s hits, supported by a seamless interface, and promptly delivered to your home. And all this on a format that is used by the majority of Americans. According to NPD’s latest “Entertainment Trends in America” update, 75 percent of U.S. consumers watched a movie on a DVD or Blu-ray in the past three months, compared to 22 percent who rented using video-on-demand (VOD), 21 percent streamed via subscription, and only 4 percent who rented a temporary download.

There’s nothing wrong with a company striking new ground, of course, but the trick is timing. In the weeks following Netflix’s announcements, NPD’s VideoWatch tracking service revealed significant declines in subscriber ratings of their overall experience and value scores. In other words, customers were angry. In NPD’s ongoing tracking of music and home video, we’ve seen a direct relationship between those customer scores and market share trends.

Netflix works because there was that one-stop shop with a unified website. If you couldn’t get Hitchcock’s Rear Window on a stream, it went into your DVD queue and you watched something else. Separating the services not only diminished the consumer experience, it may have put the streaming business at risk. Lacking a deep catalog, as well as current titles, Watch Instantly as a stand-alone service was at peril of being perceived as a direct competitor to Hulu or on-demand television channels. Even YouTube is a major challenge on small screen devices. Unifying the physical and digital markets provides the best customer experience and differentiates Netflix from its competitors. Happy customers will migrate to their streaming offering when digital video becomes mainstream and as multi-screen watching evolves. Don’t let the price increase bother you, either: Though some people are complaining, Netflix customers in general spend a lot more than average on movies — even for physical discs, and TV VOD.

I’ll offer these three predictions: First no more announcements from “The Netflix Team” for a while; second, a reversal of falling customer satisfaction scores, and finally a return to expanding domestic subscriber growth.

The Taming of the OTT Video Shrew

Like many disruptive technologies and market segments, the over-the-top (OTT) video market has been cast as the great equalizer. Greedy corporations would be forced to concede to consumer demands for viewing TV and movie content when, where, and on the device of choice. We could finally be rid of the expensive pay TV services, in favor of less expensive, but more personalized, online entertainment services. The day of reckoning for the US entertainment industry was just around the corner.

Somewhere along the way, this utopian vision has been lost. A dramatic shift in the industry is happening that will take the OTT market down a path quite unimaginable just a few months ago. Signs of this seismic shift are everywhere. Over the past year, Netflix has found itself vilified and rejected by HBO, Showtime, and most recently Starz. There is little chance for mending fences in the short term.

Forced to fight, Netflix appears to be headed towards a new strategy that will transform the company into an online premium-TV network. Like HBO and other premium TV channels, Netflix will attract and retain subscribers from original TV programming and high-value movies. They will be introducing their first original TV series, “House of Cards,” in 2012, and they are busy licensing a wide array of supplemental recent TV series, movies and specials. Welcome the newest premium TV channel: on-demand, unbundled, and multi-platform.

Other streaming VOD services are going down another path. Last week, DISH Network announced a Nefllix-like streaming VOD service under the Blockbuster Movie Pass moniker, but the service is not designed to compete directly with Netflix. The Movie Pass service will be available only to subscribers of DISH satellite pay TV service. Thus, Dish is positioning Movie Pass as an extension of their core pay TV service.

Even Microsoft is aligning itself more closely with the pay TV industry. The company recently announced its Xbox Live video service that will stream live broadcast TV programming. The Xbox service is linked to TV Everywhere services, such as Comcast’s Xfinity and Verizon FiOS services. As long as you have an appropriate pay TV subscription, users will be able to stream live TV broadcasts to their TV via their Xbox 360. Not exactly disruptive, is it?

As streaming VOD migrates toward a more premium TV-centric model, movie studios still must monetize their movies through online rentals and electronic sell-through (EST). The studios are realigning their release windows and introducing the Ultraviolet digital locker platform to encourage more online video purchases; yet much of their success will be left up to fledging transactional VOD (T-VOD) suppliers, such as Vudu, CinemaNow, Amazon, Alphaline, Qriosity and Blockbuster. Consumers have been slow to adopt online video rentals/purchases and the content producers have limited leverage to speed up the process.

After all is said and done, it appears that the OTT video shrew has been tamed. The OTT video market will be split between the pay TV industry commandeering the subscription VOD services and the movie studios that will control online rentals and EST. Maybe it was inevitable. Maybe it is for the best. Even though we will continue to pay premium rates for entertainment, we will at least be able to view it when, where and on the devices we choose.

Blockbuster? Really?

The next big force in video rentals is (ta-da!) Blockbuster. Really? You ask. Not Netflix, Quikster, Vudu, Roku, Apple…? Nope: Blockbuster. The same Blockbuster tortured by financial analysts and left for dead until bought by DISH Network at a fire sale. DISH Network announced a new Blockbuster initiative that would offer discs by mail, movie streaming, and a package of value added channels. Read more »

Dear Mr. Katzenberg . . .

Dear Mr. Katzenberg,

Thank you for saying what we all have been thinking. When the “art” sucks (your words apparently), we stay away. Though you were referring to 3D Movies, your comments echoed something NPD’s entertainment research has shown for more than a decade: Despite all the distractions in the entertainment business, ultimately it is content that will determine success or failure. Read more »

Spotify, Hulu and the Connected TV

It was once said that the U.S. arms of big music labels would never agree to support a service like Spotify. But in doing so, they have helped to produce a service far more compelling than homegrown free music download effort Spiralfrog that spiraled downward in 2009. For years Spotify and Hulu have been two of the most beloved streaming entertainment services available; however, now that Spotify is finally available stateside, the freemium music service provides an interesting contrast with Hulu. Read more »

I Don’t Trust Digital Stuff

That sentiment is not mine, but it is one that comes through loud and clear from NPD’s latest Online Software Purchasing Report. And while it may be a stretch, these findings may also offer us some insight into consumers’ acceptance of owning virtual content going forward. Consumers are clearly used to buying (and renting) things digitally, iTunes is the largest music store in the U.S. according to NPD, and Netflix streaming is undeniably rocketing in popularity as it is incorporated into more and more devices. But strangely it always feels that computer software remains behind the adoption curve. Sometimes it’s bandwidth, sometimes it’s security, sometimes it’s awareness (or just plain interest), and sometimes it’s just comfort; but consumers desire to download real productivity software is clearly behind where they are in getting their other virtual content.

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