The Disrupter’s Dilemma

 

640px-Netflix_2015_logo.svgWhat’s the first thing a brash new business does when it reaches a certain level of success and profit? Easy: Frantically protect its position, either through regulation or cracking down on customers.

Netflix, which has blazed a path through my business (television) with the kind of merciless focus you see in truly great companies, nevertheless has a problem. Its business was built on the exponential increase in bandwidth. People everywhere and anywhere can touch a few buttons and connect to a vast library of viewing choices, confident that some combination of wireless data transfers and fiberoptic cable will bring them movies, television shows, whatever they want. At peak traffic hours, Netflix is sending about a third of all the data zooming around the Internet.

But with nearly unlimited bandwidth comes the expectation of nearly unlimited access. Which is a problem, because Netflix is building a business dependent upon geographic zones: i.e, some shows are licensed for the US market, some for Europe, some for wherever.

Data doesn’t like those artificial barriers. Data — especially in its most popular form, movies and television — wants to go where the eyeballs are, wherever they are. So smart folks have figured out a way to circumvent location restrictions by using virtual private networks — VPNs — to get everything on Netflix anywhere they are.

And now Netflix is fighting back. From Wired:

In January, Netflix announced it would begin blocking a popular tech workaround known as a VPN, or virtual private network, that allowed customers beyond the US to access the same shows and films as American audiences. But as Netflix has aggressively pursued an ever-bigger global audience, simmering unhappiness over the ban is reaching a boil. An online petition demanding that Netflix change its policy has more than 36,000 signatures. And a new survey reveals that the crackdown may lead to piracy.

May lead to piracy? Will lead to piracy.

For Netflix, the issue is a fragile one. The company, after all, is dependent on studios and networks for much of the content that it streams on its platform. The crackdown is a way to show Hollywood studios that Netflix respects its regional licensing agreements—in essence, that it will only let people who it’s paid to let see certain shows and movies see them.

But paying Netflix subscribers don’t care what, say, Sony or the CW want: they want (and expect) to see what they want to see. They also want to be able to use a VPN for privacy and practical reasons. Until Netflix can offer the same content everywhere to everyone who pays for it, many users—especially the overseas users the company most covets—won’t be happy.

This is a big issue — to me, especially — because multiple markets for entertainment means, essentially, a lot more money. The television business has collapsed, in part, because the independent local broadcasters no longer have the money (thanks to the expanding cable universe) to buy lots of reruns. Bigger scale and fewer markets means smaller margins (think Walmart) and, for those of us who happen to make our money in those margins, it’s a scary thing to imagine one worldwide market for everything in the entertainment business.

For Netflix, the solution is clear: Make a lot of original content where you can set the terms any way you like while simultaneously making a big show of cracking down on VPNs, despite knowing it’s a doomed game. Data wants to be everywhere all the time. Data doesn’t care that I have a mortgage.

Neither do the customers. And, like all free-market economic principles, that’s as it should be. But like all free-market economic principles, they’re so much easier to like when it’s the other guy getting clobbered.

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  1. Guruforhire Member
    Guruforhire
    @Guruforhire

    It was very annoying not being able watch the shows I wanted to watch while traveling overseas.

    • #1
  2. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    Guruforhire:

    It was very annoying not being able watch the shows I wanted to watch while traveling overseas.

    Therefore, Amazon Prime.

    • #2
  3. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    Rob Long:For Netflix, the solution is clear: Make a lot of original content where you can set the terms any way you like while simultaneously making a big show of cracking down on VPNs, despite knowing it’s a doomed game.

    I hadn’t considered that angle (I thought the original programming was just about creating exclusive content, but I guess that’s my failure of imagination).

    Last I’d heard, Netflix was very cagey about discussing the actual economics of these shows (viewers, profitability, etc). Has that changed at all?

    • #3
  4. Larry3435 Member
    Larry3435
    @Larry3435

    One thing I’ve wondered about Netflix – there are some pretty good shows that have simply disappeared.  They’re not in syndication, and you can’t find them anywhere.  Why don’t the owners license them to Netflix?  For example, back in the 80’s I really used to like Moonlighting.  I wouldn’t mind watching that series again.  What good is it doing sitting on a shelf somewhere?  Why don’t the owners license it?  Another – someone on the flagship podcast (Rob, I think) mentioned Night Court.  Funny show with many awards.  Let’s see it again.

    • #4
  5. BrentB67 Inactive
    BrentB67
    @BrentB67

    Great article. The commoditization of everything has many unintended consequences and potential opportunities, but the transition is painful.

    • #5
  6. Austin Murrey Inactive
    Austin Murrey
    @AustinMurrey

    Funnily enough I had a friend who used a VPN to get shows Netflix had available in Europe but not the U.S. – “Penny Dreadful” was what he was after, some mystery show about vampires I gather.

    I’ve always wondered what the license fees were like for content providers to Netflix, why is it beneficial to have movies on Netflix or Amazon Prime streaming?

    One of the things that annoys me as a long time Netflix subscriber is the dwindling content as well – they used to have all the movies I wanted to watch before the studios and networks realized people liked streaming way more than DVD’s and then the content got sharply reduced.

    • #6
  7. Ball Diamond Ball Inactive
    Ball Diamond Ball
    @BallDiamondBall

    I resented the CD price switcheroo so much that I saw no moral problem in downloading vast amounts of music on Morpheus.

    Likewise, I so thoroughly detest attempts to “localize” me that I have zero issue with overcoming that through whatever means necessary.

    I have accounts on US cards with US companies to watch US content and you want me to pay Japan prices and watch Japanese ads? Screw you.

    I am willing to pay. Let me buy what I want.

    Regionalization is a damnable cabal scheme, and I hope video eats dirt as hard as audio did.

    Bless AppleTV, which only asks me how I want to pay.

    • #7
  8. ctlaw Coolidge
    ctlaw
    @ctlaw

    Tom Meyer, Ed.:

    Guruforhire:

    It was very annoying not being able watch the shows I wanted to watch while traveling overseas.

    Therefore, Amazon Prime.

    Please clarify. Amazon prime downloading was geographically limited the last time I traveled abroad. There may be more flexibility in pre-downloading when in the US and then watching abroad, but I am not sure.

    • #8
  9. Ball Diamond Ball Inactive
    Ball Diamond Ball
    @BallDiamondBall

    After a little UFC, I’m going to watch the latest installment of The Hollow Crown, which is MAGNIFICENT.
    This is the new right, the South Park Conservatives.

    • #9
  10. Kevin Creighton Contributor
    Kevin Creighton
    @KevinCreighton

    Fantastic article, Rob, well done.

    The music industry relied on controlling the distribution for most of if the 20th century, then came Napster, et al, and the profits went bye-bye until Apple figured out how to make money off of digital downloads. Now Apple’s digital sales are falling as customers move on to Spotify, Pandora and other streaming options.

    Change doesn’t care about your business model, it just changes.

    The TV industry is learning the same lessons, especially know with DVD/Blu-Ray sales of old episodes in the toilet.

    The deer now have guns. What do you do when that happens? You get into the ammunition business.

    • #10
  11. Paul Erickson Inactive
    Paul Erickson
    @PaulErickson

    Read a book.

    • #11
  12. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    As someone in another country,  the regional licensing stuff is maddening for consumers.  Netflix in Canada is a pale shadow of what it is in the U.S.  Our networks sometimes delay shows by weeks or months over when they are aired in the U.S. and elsewhere due to license limitations,  making it very difficult to avoid being spoilered and shutting us out of the discussions of such shows as they are aired elsewhere.

    It also feels like an increasing number of links to video content on the internet return  the message “This programming is not available in your region”.

    Rob’s right – information wants to spread.   At some point,  the content producers are going to have to figure out that they cannot try to restrict the flow of content,  or they will be eaten by competitors (like Netflix and Amazon original programming) that have no restrictions and thus can build bigger audiences faster.

    The other downside to programming for the world is that it tends to take the nuance out of the content.  Material that relies on subtle social cues, values, or humour intrinsic to one area may not play globally,  so instead of getting thoughtful movies we get explosions and romances or movies on other subjects that translate to a wide global audience.  And of course,  lots of anti-capitalist, anti-American content, because that plays well outside the U.S. as well as in Berkeley and at Yale movie nights.

    • #12
  13. lesserson Member
    lesserson
    @LesserSonofBarsham

    Larry3435:One thing I’ve wondered about Netflix – there are some pretty good shows that have simply disappeared. They’re not in syndication, and you can’t find them anywhere. Why don’t the owners license them to Netflix? For example, back in the 80’s I really used to like Moonlighting. I wouldn’t mind watching that series again. What good is it doing sitting on a shelf somewhere? Why don’t the owners license it? Another – someone on the flagship podcast (Rob, I think) mentioned Night Court. Funny show with many awards. Let’s see it again.

    I’m sure this isn’t true for all of them but a good number of them I’ll bet just haven’t had the work done to them that would make them available for streaming (the digital work I mean). The cost in doing that may not break even with syndication.

    • #13
  14. Tom Meyer, Ed. Contributor
    Tom Meyer, Ed.
    @tommeyer

    ctlaw:

    Please clarify. Amazon prime downloading was geographically limited the last time I traveled abroad. There may be more flexibility in pre-downloading when in the US and then watching abroad, but I am not sure.

    I was referring to the ability to pre-download (same applies to iTunes). If there are any restrictions on it, I’ve not encountered them.

    • #14
  15. iWe Coolidge
    iWe
    @iWe

    Tom Meyer, Ed.:

    ctlaw:

    Please clarify. Amazon prime downloading was geographically limited the last time I traveled abroad. There may be more flexibility in pre-downloading when in the US and then watching abroad, but I am not sure.

    I was referring to the ability to pre-download (same applies to iTunes). If there are any restrictions on it, I’ve not encountered them.

    There is only a handful of Amazon Prime downloadable content. I have done this for airplane flights… not much to watch.

    • #15
  16. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Rob Long: May lead to piracy? Will lead to piracy.

    Yabbut, it should be remembered that piracy is always the fault of the pirate, not the fault of the party simply trying to follow the rules and protect their property.

    Saying that Netflix’s policies lead to piracy is like saying that locking a door leads to lockpicking.

    (And I write that as someone who isn’t completely adverse to using bittorrent when legal avenues for content delivery don’t get me what I want.)

    • #16
  17. Johnny Dubya Inactive
    Johnny Dubya
    @JohnnyDubya

    One thing has really puzzled me about Netflix.  They have emphasized their streaming business, to the extent that they no longer even bother with providing a smartphone app to manage your DVD queue.  DVDs are so yesterday!

    But you can get just about any movie from their DVD arm, while the movie selection from their streaming business stinks – it is dominated by older films, low-budget B-movies, and films with A-listers that nevertheless did poorly with critics and audiences.  They do have a fair amount of worthwhile original content for streaming, though.

    • #17
  18. EJHill Podcaster
    EJHill
    @EJHill

    There are sites on the web (which I will not mention) with libraries vastly larger than Netflix. The quality is sketchy at times (think 480 resolution on YouTube) but watchable. The amazing thing is that they are fan driven sites. People record the shows on their computers, covert them to flash and upload them to a video server.

    The television distribution market is getting killed by Twitter and Facebook. The nets are slowly coming to terms with this. BBC has twice debuted shows on BBC America and with their PBS partners on the same day as their broadcast in the UK because they realized the Internet would greatly diminish their value otherwise.

    • #18
  19. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Johnny Dubya:One thing has really puzzled me about Netflix. They have emphasized their streaming business, to the extent that they no longer even bother with providing a smartphone app to manage your DVD queue. DVDs are so yesterday!

    But you can get just about any movie from their DVD arm, while the movie selection from their streaming business stinks – it is dominated by older films, low-budget B-movies, and films with A-listers that nevertheless did poorly with critics and audiences. They do have a fair amount of worthwhile original content for streaming, though.

    It’s interesting that they still have a DVD-by-mail business.

    They never expanded that part of their business into Canuckistan. We had a domestic DVD-by-mail provider (zip.ca) which I subscribed to, but sadly they went out of business when streaming took off in a big way.

    • #19
  20. EJHill Podcaster
    EJHill
    @EJHill

    John – Because in Syndication the price set on rights is based on the size of the market. A station in Beaumont, TX may run the same shows as a station in New York but doesn’t pay New York rates.

    Canada has around 35 million people. You don’t want the Chinese market leaching into that.

    • #20
  21. skipsul Inactive
    skipsul
    @skipsul

    Larry3435:One thing I’ve wondered about Netflix – there are some pretty good shows that have simply disappeared. They’re not in syndication, and you can’t find them anywhere. Why don’t the owners license them to Netflix? For example, back in the 80’s I really used to like Moonlighting. I wouldn’t mind watching that series again. What good is it doing sitting on a shelf somewhere? Why don’t the owners license it? Another – someone on the flagship podcast (Rob, I think) mentioned Night Court. Funny show with many awards. Let’s see it again.

    Might be on Hulu.

    But the answer is often complicated – a show may have run on ABC, but been produced by another company, with music rights leased from a 3rd.  In short, the chain of IP custody can be so tangled, and the various owners and interested parties so opposed to each other, that the show is trapped.

    Just look at DVD releases.  Often, especially on older shows, a bit of music was just licensed for broadcast rights only, and the show has to be re-edited with different music before it can go to DVD.

    Ready Player 1 was a great book, and is being made into a movie, but the book contains so many 80s culture references that the movie’s production was long delayed while each and every interested party negotiated a usage contract.

    • #21
  22. Pilli Inactive
    Pilli
    @Pilli

    Larry3435:One thing I’ve wondered about Netflix – there are some pretty good shows that have simply disappeared. They’re not in syndication, and you can’t find them anywhere. Why don’t the owners license them to Netflix? For example, back in the 80’s I really used to like Moonlighting. I wouldn’t mind watching that series again. What good is it doing sitting on a shelf somewhere? Why don’t the owners license it? Another – someone on the flagship podcast (Rob, I think) mentioned Night Court. Funny show with many awards. Let’s see it again.

    Night Court is available on Laff TV.

    • #22
  23. skipsul Inactive
    skipsul
    @skipsul

    anonymous:As the guy who figured out how to beat DVD region coding on Windows 98 (this trick no longer works), I’ve always been puzzled by the business model which motivates content producers to restrict distribution of their products. Rob Long writes:

    This is a big issue — to me, especially — because multiple markets for entertainment means, essentially, a lot more money.

    How, exactly, does this work? If the customer is paying to view the content (either on a per-view basis or as part of a subscription), then how does reducing the size of the market and the potential audience increase revenue to the content producer?

    In every business I’ve been involved in, you wanted to make your product available to as many potential customers in as many different markets as quickly as possible. Why is the entertainment business different?

    Pricing.  Microsoft had to make WinXP super cheap in China to get people to use legal copies.  But they wanted us to pay full whack.

    Sure your model was to get as many people buying your product as possible, but often the model is instead to get as many people to pay the highest bearable price for their given market.  So you charge $250 for a textbook in the US, but $30 in India for the same thing.

    • #23
  24. Pilli Inactive
    Pilli
    @Pilli

    Ball Diamond Ball:After a little UFC, I’m going to watch the latest installment of The Hollow Crown, which is MAGNIFICENT.
    This is the new right, the South Park Conservatives.

    So where do I go to see Hollow Crown?  You’re right it is MAGNIFICENT.

    • #24
  25. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    skipsul: Just look at DVD releases. Often, especially on older shows, a bit of music was just licensed for broadcast rights only, and the show has to be re-edited with different music before it can go to DVD.

    The greatest example of this phenomenon is WKRP In Cincinnati.

    The music rights for the short clips of rock songs they played were really cheap when the show was produced. When the show was re-released on DVD the rights owners jacked up the price, so the songs were all replaced with generic “rock” muzak.

    Unfortunately, there were many pieces of dialogue that referenced the song being played, including jokes that depended on the song being played. “What’s the name of this orchestra?” “Pink Floyd”

    You simply cannot have the first rock song played by Dr. Johnny Fever NOT be Queen Of The Forest. It’s just wrong.

    • #25
  26. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Larry3435:One thing I’ve wondered about Netflix – there are some pretty good shows that have simply disappeared. They’re not in syndication, and you can’t find them anywhere. Why don’t the owners license them to Netflix? For example, back in the 80’s I really used to like Moonlighting. I wouldn’t mind watching that series again. What good is it doing sitting on a shelf somewhere? Why don’t the owners license it? Another – someone on the flagship podcast (Rob, I think) mentioned Night Court. Funny show with many awards. Let’s see it again.

    Netflix isn’t the only streamer. Many of those older shows can be found on other sites, like Hulu or Crackle.com. Presumably, the rights owner goes with the streamer that offers them the best deal.

    Older shows are also often available on YouTube. The rights owner doesn’t even have to upload a copy themselves, but they can still get a cut of the ad revenue.

    • #26
  27. The Glaswegian Inactive
    The Glaswegian
    @TheGlaswegian

    Ball Diamond Ball:

    Bless AppleTV, which only asks me how I want to pay.

    Apple TV has the same geographical restrictions as Netflix.

    • #27
  28. Chris Member
    Chris
    @Chris

    ctlaw:

    Tom Meyer, Ed.:

    Guruforhire:

    It was very annoying not being able watch the shows I wanted to watch while traveling overseas.

    Therefore, Amazon Prime.

    Please clarify. Amazon prime downloading was geographically limited the last time I traveled abroad. There may be more flexibility in pre-downloading when in the US and then watching abroad, but I am not sure.

    This is not where Tom was going, but Amazon Prime is not blocking the VPNs, presumably because video is not its core business.

    A few weeks ago Netflix stock got a nice pop with the announcement of new global deals (including India).  They now need to add local viewers in all their markets to meet targets.  Canadians with a US address, expats, and non-US citizens using VPNs all have been shut out of US Netflix as Netflix needs you to pay locally.  If you don’t think VPNs are big business, just go to iTunes or the Android Marketplace and type in VPN.  The change officially went into effect last week – this has been a big topic amongst the overseas crowd.

    For Amazon, the video portion of Prime started as a sweetener or complimentary product to their online store model.  It wasn’t too long ago that Prime was just shipping, and our family was happy with that.  Now we have the video and music content, although I’ll admit to not using the music content.  In Europe, the only place offering Amazon Prime is the UK – as opposed to Netflix offering local packages in many nations.  Cannibalization risk is low.

    In short, Amazon could care less (for now) if some people are using VPNs as long as they have a Prime subscription.  This could change, but it’s the situation as of today.

    • #28
  29. ctlaw Coolidge
    ctlaw
    @ctlaw

    skipsul:

    anonymous:As the guy who figured out how to beat DVD region coding on Windows 98 (this trick no longer works), I’ve always been puzzled by the business model which motivates content producers to restrict distribution of their products. Rob Long writes:

    This is a big issue — to me, especially — because multiple markets for entertainment means, essentially, a lot more money.

    How, exactly, does this work? If the customer is paying to view the content (either on a per-view basis or as part of a subscription), then how does reducing the size of the market and the potential audience increase revenue to the content producer?

    In every business I’ve been involved in, you wanted to make your product available to as many potential customers in as many different markets as quickly as possible. Why is the entertainment business different?

    Pricing. Microsoft had to make WinXP super cheap in China to get people to use legal copies. But they wanted us to pay full whack.

    Sure your model was to get as many people buying your product as possible, but often the model is instead to get as many people to pay the highest bearable price for their given market. So you charge $250 for a textbook in the US, but $30 in India for the same thing.

    Relatedly, you have local content laws and franchises. The government of Garbagistan does not want content from the civilized world displacing its TV production industry. Thus, the civilized world producer of a  TV show will license the name and format to Garbagistan Broadcasting Company (GBC). GBC will sue anybody who tries to bring the original in to compete with them. Same goes when the franchise is for a particular language…

    • #29
  30. Sash Member
    Sash
    @Sash

    You guys realize you are not actually speaking English right?

    • #30

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