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Why Comcast Should Buy Netflix
Recipe for building a monopoly in movie content distribution
By: Bruce Bahlmann - Contributing Author (your
feedback
is important to us!)
Created: April 20, 2005
This paper is the product of
VoD Market Research which is available from Birds-Eye Network Services.
Today’s modern technology companies can be pretty
much boiled down into three fairly broad areas: content producers,
content deliverers, and those that facilitate the delivery or creation
of content. However as broad as these areas may appear, there are
companies aspiring to do it all. Recently, Comcast has not only become
the largest cable operator in the United States but has also amassed an
increasing array of content owners and distributors. Comcast may well be
creating the beginnings of a monopoly in the area of content creation
and distribution. The only piece missing (besides more content) is a
battle hardened yet technologically advanced company that could
facilitate and organize the distribution of this content super power –
enter
Netflix.
Next Generation Content vs Plain Old Television Service
 Grab the most advanced set top box (STB) offered by any
cable company and take it for a test drive paying close attention to its
respective usability, convenience, and access to new and old content. Next
take a test drive of the Netflix website with an emphasis to gauge similar
functionality. The whole exercise is a waste of time because the answer is,
there really is no comparison. The closest thing that Comcast has to Netflix
is a service called Video on Demand (VoD) which although it is a very neat
and growing in popularity service, its usability pales in comparison to the
superior website ease of use and distribution network of Netflix which
currently hosts over 40,000 movies. Cable VoD which are in their infancy
compared to the mature video rental services speak of giving customers
immediate access to some number of hours of content (usually between 1,000
and 5,000 hours of new releases) with plans to add several thousand more.
Within the same timeframe Netflix speaks of adding thousands of more movie
titles all of which are entered into its extensive database which is cross
indexed by director, actor, genre, reviews, and friendly suggestions - not
to mention an increasingly intelligent user profile. The whole Netflix
distribution system is like a well oiled Wal-Mart store – intelligently
organized to stimulate rentals of videos that will generate the most
pleasant response from its customers. Happy customers stay loyal to the
service and drive suggestion of new titles and enhancements to the service
that in the end attract even more customers.
 A cable operator would be hard pressed to recall the
last enhancement request that one of its subscribers’ asked to see in their
STB viewing guide and how long such a request actually took to get
implemented (if it was ever recorded in the first place)? The problem with
such requests is that in order for it to be implemented, it must be
developed on the STB’s Electronic Program Guide (EPG) application. Since
STBs are very resource constrained devices, there is a finite range of
functions it can perform. Should any changes be accepted, adding them to the
EPG application is an extremely labor intensive exercise taking months of
development and even more time regression testing these applications to
ensure the new functionality doesn’t negatively impact the hundreds of other
functions that the existing EPG already performs. The concept of moving the
main interface of STBs off the EPG to an external website certainly have
been explored, only there still many challenges remaining before such
functionality will hit the mainstream of digital video services. However,
until this happens, VoD will remain a very simplistic service compared to
even the most basic of video rental services it aspires to model.
The whole concept of distributing movies over cable
television lines is analogous to going back into the dark ages. It’s like
renting a video on betamax instead of on a DVD – the quality of experience
is night and day. While digital television has really improved things for
cable, even with the heightened quality of video added, by in large the
technology devoted to the overall user experience is far inferior to what is
happening on the Internet via the likes of Netflix.
Netflix is poised to pounce on the next generation of
content distribution as movies increasingly become digitized files that can
be securely be downloaded and played anywhere and on anything. Instead of
sending its movies via snail mail, Netflix is well positioned to pump out
its content via large data warehouses “Over the Top” of similar services
offered by broadband operators. The real gem of Netflix is not the business
or its customers but its content database which makes finding great movies
time and time again increasingly easy. Adding hours of content is great and
all, but if you can’t help customers easily find and choose movies they most
like to watch, well then its like having 300 channels with nothing to watch.
Existing VoD therefore promotes a type of “channel surfing” for customers -
forcing them to sample what is available in order to select what might be of
interest. As the number of hours of VoD content amass and the difficulty of
finding and selecting its VoD content increases, Comcast is going to wake up
and smell the coffee to realize what it is sorely missing.
Wouldn’t if be great if you could logon to Comcast.com,
find exactly what you want to see or be guided to programming that most
interests you, and then hit “Play” which set in motion a sequence of events
that would show this movie on your television. With iTunes-like convenience
you go from looking to viewing. Wouldn’t it be great if it didn’t matter
where you live or whether you were even a Comcast customer because so long
as you could access a high speed Internet connection you could receive your
chosen content be it live broadcast or movie. As broadband speeds eclipse 3
M/b/s the reality of finding this kind of content provider becomes less of a
pipe dream and more main stream. Perhaps you are traveling and want to
access your local television station’s nightly news, or like in the movie
“Doc Hollywood” you are interested in the goings on of someplace you felt at
home – and such programming is immediately and conveniently accessible. As
Comcast increasingly becomes a major content distributor for VoD content,
its needs for a real backend distribution system like Netflix will come to
light. Interestingly, Comcast could continue operating Netflix’s current
video rental business while reworking this new asset to simultaneously
support video over Internet Protocol (IP) as well as provide much needed
depth of functionality and organization to its existing VoD service. The
Netflix backend could even help Comcast organize its digital video offering
by allowing customers instant access to all broadcast events, 3rd
party movies, as well as the increasing archive of movie content that
Comcast is amassing.
Tale of the Long Tail
Another difference between modern VoD services and and
large on-line distribution warehouses like Netflix is unveiled within
something called the “Long Tail”. Studies have shown that while new releases
are very popular to viewers, equally if not more popular are older films,
classics, special interest films, documentaries, art films, exercise videos,
classic sporting events, etc. Essentially, if you chart the demand for
movies on a line graph, you have this huge spike in rentals for each of the
new releases. However, if you have a large library that is massively cross
referenced, the rental of these movies represents a “Long Tail” on the chart
which in terms of numbers of combined rentals equals if not overtakes new
releases. Interestingly, if you go to Netflix, new releases don’t just pop
out at you, rather they are buried under one or two levels of listings.
While equally accessible, Netflix generally shows its customers what else is
available while they go looking for the popular new releases. During this
process, customers become aware of the real value of a warehouse type video
renter like Netflix – a huge selection. Not even the Blockbuster stores
maintain this type of inventory (shelf space – like VoD disk array or SAN
space) is a premium so VoD and retail video rental stores must constantly
cycle “stale” or “slow moving” content. Interestingly, a movie that only
gets rented or viewed a couple times a month gets removed from storage or
shelves and replaced with something possibly more popular by VoD service
providers and retail video rental stores. Netflix happily maintains an
inventory of these movies for those individuals who want to watch them. How
many of these seldom watched movies get rented by Netflix customers?
According to Neflix - all of them!
DVD vs DRM vs Digicipher
Another interesting fact is as the likes of Netflix,
Blockbuster, etc. expand at will in spite of all the DVD security flaws, the
cable industry seems overly focused on trying to create a fool proof system
of delivering video content that cannot be copied. Digicipher which
represents a Motorola encryption technology used in one of the more popular
cable STBs is perhaps the most secure digital rights management system
available - Motorola claims it has yet to be hacked or broken. While
digicipher has been around for many years and remains unhacked, new
protection schemes for packaged media (e.g. DVD) are hacked almost as soon
as they are introduced.
While from a content owner perspective, Digital Rights
Management (DRM) is a huge issue and one of significant importance, it
easily takes a back seat when the subject of revenues comes up. Meaning, so
longs as the money is coming in, DRM is only “nice to have” as opposed to a
“must have”. However, like in the case of the music industry where revenues
are on a steep decline, DRM becomes paramount. Changing the security on DVDs
would likely render existing DVD players inoperable and since that would
impact revenues, DRM is only a subject of file downloads rather than
packaged media – even though the current protection scheme for packaged
media has been compromised. Since packaged media sales dwarf file download
sales, at least currently, the entire buzz surrounding DRM is mainly geared
towards solving the next generation video distribution needs – at least
until the needs of DVDs become obsolete.
Whether or not Comcast makes a bold, fortuitous move to
buy either
Netflix or Apple’s coveted
iTunes is obviously up to them, but
clearly the needs of creating a sophisticated distribution backend for
tomorrows media distribution business is materializing in the minds of those
aspiring to take a lion’s share of the market. What remains to be seen is
how long are they planning to wait or pay to acquire such an asset until the
stakes exceed the near term feasibility.
Check out these other Birds-Eye.Net papers/products
regarding Video on Demand (VoD):
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