Is Content Still King? The Netflix Success Story

Posted: July 6, 2011 in Consumer Power, Content, Convergence, Paid Content

Is Content King?

My friend Jonathan Knee of Evercore Partners wrote an interesting post on the Atlantic’s website about Netflix (NASDAQ:NFLX) questioning this assumption. In part, Jon discusses why Netflix is winning without paying homage to the King. The guys at WallStreetCheatSheet asked me — as a staunch supporter of the need for media companies to own their own content — to respond to Jon’s columns.

Here is the resulting response to Jon’s main points:

Jonathan Knee

Damien Hoffman: Larry, Jon says Netflix’s success is “unnerving” because content creators are struggling to stay profitable while a “redistributor/aggregator” thrives. Do you see this as unnerving or something different?

Larry Kramer: I do believe it’s a bit “unnerving” to content creators but for a different reason. They are seeing their traditional partners (e.g., cable MSO’s, Satellite providers, etc.) threatened. Jon has done an excellent job in describing the reasons behind Netflix’s (NASDAQ:NFLX) fantastic success and the value of serving a customer base the WAY it wants to be served. But, most of the problems content creators are having relate to costs of their existing distribution systems, not the cost of CREATING great content.

Video content creators for television and movies are churning out more excellent programming than ever, but the squeeze is happening at the distribution level. So, the syndicaters and cable MSOs are starting to push back against increases sought by content providers. For now, Netflix (NASDAQ:NFLX) actually offers some relief to the content creators because they represent an additional revenue stream, since Netflix is paying for the programming. The difficulty for the creators is knowing how much of that upside will be eaten away by the other distribution partners asking for relief.

The networks are also concerned that Netflix’ existing model — which calls for no advertising — could cause problems for traditional distributors who run ads because consumers could come to prefer programs with no ads. That could drive viewers away from the advertising model. The amount people will pay for that privilege, however, is still unclear and may always be a moving target.

But the networks, in the end, will still get paid for their content … either with advertising or fees.

Damien: Should companies stop focusing on content creation if it’s such an inferior business to aggregation (according to the article)?

Larry Kramer

Larry: Absolutely not. Aggregation is important when consumer habits are changing like they are now because it’s harder and harder to understand what experience the consumer really prefers. But the industry needs to stay close to that and understand it. Netflix (NASDAQ:NFLX) is in an ideal position because it uses so many different distribution systems that it can follow users from one to another.

The Cable MSO’s have already begun to fight to distribute their programs on iPads (NASDAQ:AAPL), and other devices. But just because consumers demonstrate a preference for certain types of delivery doesn’t mean we have a working business model. Hulu (NASDAQ:CMCSA) (NYSE:GE) (NYSE:DIS) is a perfect example. Great technology, lots of consumer acceptance, but the business model depends on relationships with its owners that won’t stand the test of time.

The content creator will still be the one that understands what kind of content the consumer wants and learns to give it to him or her. The content creators’ job has gotten a lot more complicated because they have to adjust to the new platforms their customers want to use to consume that content and make sure they optimize the content for each of those.

Damien: In relation to the 4 C’s — Consumers, Content, Curation, and Convergence – how does Netflix score as a media company in the new Golden Era?

Larry: Netflix (NASDAQ:NFLX) has quickly understood the power of the Consumer because it spent generously to go onto multiple platforms even before they were big. That represents a true understanding of the Convergence of distribution platforms. People want to buy something once and use it wherever they are. Netflix understood that. They also understood their role as a Curator, offering a wide choice of content to their customers, but spending money on only the content they felt was important enough to those customers. If they picked badly, no one would come. But they understood what Content people would want across all their platforms. And guess what, as Jonathan pointed out, they have also begun to develop their OWN content. That can only mean they know they have to prepare for the time when others might not allow them to have all the best content.

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