Netflix

Describes motivation process for creativity with emphasis on intrinsic motivation by Corey K Katir

By Thomas D. Nevins

The court found that Netflix’s evidence had proven “market facts” defeating plaintiffs’ contention that subscribers would have paid lower prices absent the Promotion Agreement. Id. There being no triable issue on fact of injury, the court granted summary judgment as to both plaintiffs’ Section 1 and Section 2 claims.
 

Blockbuster (BBI) is on its last legs. After moving billions upon billions of dollars through its registers, shepherding the transition from VHS to DVD and DVD to Blu-Ray and watching Netflix (NFLX) and Redbox invent new ways to rent movies, it stands on the brink. Last month, it warned the SEC that it could declare bankruptcy anytime (a threat that has since ebbed slightly), it plans to close more than 500 stores this year, and itas in danger of getting delisted from the New York Stock Exchange. After 25 years, it appears people just donat want to go see a Blockbuster anymore.

But when I told Kevin Lewis that I was worried about whether Blockbuster could survive, his face contorted. Lewis is Blockbusteras senior vice-president of digital entertainment, and he is a man who believes in his employer. A few weeks ago, I met with him and two other guys in charge of Blockbusteras digital strategy at the companyas loft office space in downtown Manhattan. Itas meant to be the headquarters for the digital teamathe group of staffers who carry the weight of Blockbusteras future. On the day I visited, none of the staffers were in the office. I suppressed the urge to see a metaphor where there wasnat one. (They were all traveling.)

Blockbuster, I was told over and over again, is poised for a comeback. Its brand is more established than any other. Itas the only company that can offer movies in stores, in kiosks, online, and by mail. Most importantly, just because more and more Americans watch movies onlineawhether it be through Web-connected computers, Blu-Ray players, or DVRsadoesnat mean they want to stop watching the newest movies. Netflix and Redbox canat provide those when they first come out. Blockbuster is proud that it canaso proud that this is the first thing you see on its homepage:

The companyas final, last-gasp strategy to regain its swagger and prepare for the future is to harp on this fact over and over again. Lewis would not stop mentioning the amultichannel consumeraathe ideal people who aare in stores, they’re renting digitally, they’re going to kiosks, they’re buying VOD, they’re going to theaters. Theyare entertainment omnivoresa|Weare the only company that spans alla|of those (channels).a And these omnivores want their movies as soon as they can. According to Lewis, 70 percent of new rentals happen in their first 30 days of release.

When you combine all this, the motto is essentially that Blockbuster is the only place that can get you what you want, when you want it, how you want it. Taken as a whole, thatas true. But when you break down the motto to its three partsawhat you want, when you want, how you wantathings get far more muddled, and for Blockbuster, far more dire.

In Blockbusteras view, it can survive because of the chart below. It shows last yearas top-10 grossing movies that are available digitally. Lewis bragged that all of them are on Blockbuster; none are on Netflix. Itas an especially important detail, as more than half of Netflix subscribers are now streaming movies. At my request, Blockbusteras PR rep sent the chart over:

Netflix canat stream those movies online because the studios wonat let them. Compared with Blockbusteras well-stocked shelves, Netflixas digital library is like a food pantry that contains only peanut butter and jelly. Netflix has made deals with several studios that give them a larger digital catalog, but it also forces them to wait 28 days to start sending them to customers the old-fashioned way: on disc. Similarly, Redbox, the king of kiosks, is being forced to delay the release of movies as a peace offering to the studios.

On this issue, Blockbuster is right; itas far better digitally than Netflix. Blockbuster can offer digital downloads because it asks customers to pay for digital movies the same way they rent DVDsaa la carte. (The studios prefer this to Netflixas come-one, come-all digital strategy.) Renting a movie on Blockbuster runs $4.

Of course, theyare not the only company that can do that. Steve Jobs long ago realized Blockbuster was on the ropes and decided to provide an alternative. So letas amend that chart.

Nearly all are on iTunes. But thatas not the whole picture, either. If digital downloads are to be a success, theyare going to be watched on an actual TV, not on the computer screen. Netflix knows this, which is why itas putting its Watch Instantly service on every Blu-Ray, TiVo, and game console known to man. Blockbuster is trying to do the same. By the end of the year it claims itall be on nearly every brand of Web-enabled TV and Blu-Ray device sold. Of course, once these services migrate off the computer and on to the TV, theyare contending with a new force: on-demand. Cable providers have steadily added to their pay-per-view offerings. Iam trotting the chart back out, this time with a new Comcast On-Demand column added.

So Blockbuster and Comcast On-Demand are identical for at least in this small sample. Blockbusteras strategy is to double-down on these new releases because Netflix and RedBox donat have them. But if cable providers do, that invalidates Blockbusteras claim on the space. Itas correct that Netflix and Redbox have been Blockbusteras greatest enemies over the last few years. But moving forward, itas a different kind of netbox that will eventually beat Blockbusteras: the cable box.

The last piece of Blockbusteras motto left standing is its assertion that itas the premiere place you can get these films when you want them. On-Demand will soon make that moot, as well. The film industry has finally wised up and realized it doesnat need middlemen like Blockbuster anymore. It can use the cable operators instead. Last month, the New York Times reported that studios were collectively marketing on-demand cable as the best way to get their content. Theyare tossing $30 million at it, mainly because they get 65 cents from every dollar spent on on-demand, compared with roughly 25 cents at Blockbuster. As of now, not all movies get released via on-demand at the same time theyare released on Blockbuster. But Comcast told me it has more movies on-demand this year than ever before, and itas getting them sooner than it had in the past. Several of the on-demand movies from the previous chart were on-demand the same day they were available for rental at Blockbuster. Given the 65-cents versus 25-cents economics, one would figure that trend will only hold.

To be fair, Blockbusteras big strategy isnat just that it offers the movies you want, where you want them, when you want them. Itas that theyare the only place that can deliver all three at the same time. True enough. Blockbuster is readying a massive database of where all of its movies are available. This way if you want to rent, say, GoodFellas, and itas not available online, the database will tell you itas down the street at a retail location or available through Blockbusteras Netflix-like DVD-by-mail service. Itas the integrated service for the Blockbuster diehard.

But in an age of iPads, Boxees, and Netflixes, how many Blockbuster diehards can there be? This is the age of gadget diversity. We donat need or want one megalith to handle all our video needs. (Only Apple [AAPL] has managed to create the kind of cultish walled-garden that Blockbuster daydreams about.) And even for the less tech-inclinedaif a video is available on their cable box, why go outside and get it from a retail store? Or even from the Blu-Ray player that has Blockbuster DVDs. When I was at Blockbusteras digital office, their crew told me how pleased they were to be the first thing people see when they boot up a Samsung Blu-Ray player. But compared with cable on-demand, that Blu-Ray player is still a secondary option. That means Blockbuster is, too.

That leaves Blockbusteras brick-and-mortar retail business as its one unique characteristic. Of course, brick-and-mortar is what got Blockbuster into this mess in the first place. The same social trends that forced Blockbuster to shutter those stores donat look like theyare ebbing any time soon. Back-catalog movies are still available through RedBox and Netflix for far less than Blockbuster sells them for in stores. Broadband is becoming more and more prevalent in the country every day, allowing more people to download videos and skip the drive to the strip mall. Blockbuster isnat just running out of time and money. Itas running out of customers. Unfortunately, those arenat available on demand.

We know that Hulu has disrupted the way we watch TV. But itas done far less to change the way we watch movies. Thatas because right now the movies on Hulu are incredibly obscure. But that doesnat mean they have to be. Every week Hulucination will keep track of how many movies are on Hulu and how many reviews they have on Netflix (NFLX). Weall chart the results as time goes by to tell you whether Hulu is getting closer to Transformers and farther from Thunderbolt and Lightfoot.

Hulu Theater is growing tired of Huluas cinematic inertia. Yet again this week, Huluas movies are just as obscure as they have been every other week. 62.6 percent of the movies are also in Netflixas database. Theyare reviewed relatively well, with an average of three out of five stars in both median and mean. The median number of rankings is slightly higher, though. Theyave got an average of 10,254 rankings instead of 10,083.

Six years ago, Redboxes were meant to sell Goobers, not Goonies. The DVD-rental kiosks that are now in Wal-Marts (WMT), grocery stores, and McDonaldas joints across the country were meant to be automated 7-Elevens, not robotic Blockbusters. McDonaldas (MCD)awhich owned Redbox at the timeafigured convenience stores were convenient enough without somebody behind the counter. So why pay an employee when a machine could do all the work? Nothing in convenience stores is that fresh anyway, so customers wouldnat care if the personal touch was removed from the transaction.

They were wrong. Something about buying a gallon of milk without someone actually selling it was too sterile, too cold. (Or maybe the fear was that it wasnat cold enough.)

But all was not lost. At the same time McDonaldas released the convenience-store units, it also put 12 DVD kiosks into the field. People werenat as untrusting toward an automated purchase of something they didnat have to eat. They were still consuming; they just werenat ingesting.

Since then, Redbox has seemingly added an automated kiosk for every closing of a manned video-rental shop. In six and a half years, it has gone from those 12 trial units to 22,400. Thanks to Redbox, Netflix (NFLX), and the rise of On Demand (both through cable and the Internet), the process of renting a movie has been completely disrupted. Blockbuster is either teetering on the edge of bankruptcy or pretending itas not already there, and mom-and-pop rental stores have all but disappeared from small towns. Redbox is as responsible for the destruction as the rest of the hydra.

But at some point this new monster is going to run out of things to destroy. And when it does, itas going to have to start turning on itself. Last week, word got out that Redbox was thinking about streaming movies over the Internet, just like all of its other competitors. If it happened, it would be a meaningful expansion to Redboxas business model, and one that puts it in even fiercer competition with its crimson colleague, Netflix.

The reason itas looking online is because it has been so successful offline. It did that by being comfortably innovative, offering something new without ripping the rug out from under the way consumers already rented DVDs. There were four elements to the old way of doing things: 1) Renting a movie was an impulse decision, 2) a real person checked you out, 3) you got to take a real disc (or tape) home, and 4) you had to remember to bring the disc back by a certain time. The On Demand services have retained only the first step. Netflix has held on to the third. Redbox, meanwhile, has held on to three. All but the real, live person have been retained. And on top of that, Redbox threw in budget prices. Renting a DVD usually costs $1 a day.

This gradualism has paid off handsomely. In 2005, supermarket-kiosk magnate Coinstar (CSTR) bought part of the company for $20 million. Four years later, it bought the rest for $176 million. It was worth the money. Redbox is growing faster than Robin Williams in Jack. In 2009, 8,700 new kiosks were spread out across the country. Pre-existing kiosks rented $105 million more in DVDs in 2009 than they did in 2008. Coinstar took in $385 million more from DVD rentals in 2009 than in 2008 (aided, no doubt, by its full purchase of Redbox). And that extra revenue brought in more profit, too: $56 million more from DVD operations. Redbox has become by far Coinstaras biggest business. The companyas namesakeathose machines you dump your coin jars into at the supermaketanow pales in comparison, bringing in one-third of the revenue that Redbox does.

So, if things are going so well, why would Redbox turn its attention online? If it does begin to stream movies, it is going to be entering a marketplace brimming with retailers new and old. Amazon (AMZN), Apple (AAPL), and smaller upstarts allow users to rent movies a la carte. Netflix already has a streaming service on nearly every Internet-enabled device known to man. Hulu lets you watch (an obscure selection of) movies online, for free, with some ad interruptions. For these guysaNetflix includedathe online plans have to work or else theyare screwed.

But Redbox isnat nearly as desperate. It already knows it can survive as the country moves more toward online video. Otherwise its kiosk business wouldnat be thriving. But for-profit companies like to sniff for more profit. Thus it has to at least explore the online option; not doing so would be irresponsible. There is money to be made online, especially when video is paid for by the customer, not advertising. Also, getting into video streaming is a nice hedge in case online video becomes wildly more popular than it is now.

But that doesnat mean itas the right move for Redbox. At first glance, a streaming Redbox would be more in competition with Amazon and iTunes than with Netflix. But Redbox would likely be forced/able to undercut their prices because of its existing business model. Itas hard to ask customers to spend more money for something online than they would at the store down the street. The same logic applies to the local kiosk. But Redbox may not be able to afford to do that. To make online streaming happen, Redbox would likely have to renegotiate its contracts with the studios to include streaming rights. (I asked a Redbox spokesman whether this is true, but he declined to comment.) And acquiring those rights is expensive; on new releases, the number is likely more than the $1 Redbox charges at its kiosks. At first, it may have to run the online business at a loss to get the momentum going and hope that acquisition prices go down so it doesnat have to increase rental prices.

The low prices Redbox will likely charge mean itas really competing with Netflix, not Amazon, Apple, et al. But Netflixas subscription model is much pricier than Redboxas $1 a la carte strategy. (Assuming Netflix users donat stream eight movies a month.) Online, Netflix is better situated to reap profit, especially as customers ask it to stream more movies and send fewer DVDs.

Thus far, both Redbox and Netflix have been able to exist in the world of actual discs. (Netflixas own revenue has steadily risen every year for the last five.) And similar to their offline offerings, both companies would provide different services online. Redbox would go after the impulse buyer who favors more big-budget fare. Netflix would cater to the person who wants a deep library of meaningful, arty classics. Itas essentially Avatar vs. The Hurt Locker all over again. But like Avatar, Redboxas magic may not be as impressive online.

We know that Hulu has disrupted the way we watch TV. But itas done far less to change the way we watch movies. Thatas because right now the movies on Hulu are incredibly obscure. But that doesnat mean they have to be. Every week Hulucination will keep track of how many movies are on Hulu and how many reviews they have on Netflix (NFLX). Weall chart the results as time goes by to tell you whether Hulu is getting closer to Transformers and further from Thunderbolt and Lightfoot.

Even Patrick Swayze couldnat rescue Hulu Theater from the same old plotline. Despite adding Dirty Dancing to the movie roster last week, Hulu still canat avoid its 62-63 percent rut. For weeks now, 62 percent or 63 percent of Huluas movies have also been available on Netflix. Thatas the metric Hulucination uses to tell how mainstream Huluas movie section is. This week, the number remains unchanged. 63.2 percent of Huluas movies are in the Netflix database, the same number as last week. The ratings of those movies remain the same, as well. They average 2.99 stars, and a median of 10,083 rankings. Will this monotony ever end?!

At what point does a movie stop being a movie? In the Darkness, Huluas first fictional amovie,a which had its online premiere last week, may not qualify. Darkness is 60 minutes long, was shot in five days, stars no-name actors, and for its first four weeks will be distributed only online.

Whatever it is, In the Darkness shows us yet another possible future for entertainment: one where movies turn the Web into their personal theaters. As usual, we can blame this new business model on the financial crisis. Darknessa producersaa gang of relative newbiesaoriginally wanted to make a bigger, more costly film. But that required raising funds as the financial system teetered, which happened to be precisely when no one was eager to donate to pet projects. So the producers scrapped the big-film idea, narrowed their scope, and came up with In the Darkness, a movie that was cool enough to merit making, but small enough to merit a different distribution method.

The movieas plot is not as revolutionary as its business model. Two kids get killed in the high, lonesome hills, and detectives investigate. (Things, of course, are not what they appear to be.) But thatas all right , because the thing didnat cost much money. One producer, Jeremy McGovern, declined to offer the budgeting details, but itas not too difficult to tell the video was inexpensive. Not because it looks cheapathe shots and sets actually do look reasonably cinematicabut because there arenat any locations. Nearly the whole video takes place in a scorched nature reserve somewhere in the mountains, an aid to the videoas aesthetics and economics.

And if youare distributing a movie online, youave got to keep costs down. For now, Darknessa only revenue stream is through Huluas advertising. McGovern wouldnat share how much revenue they need to take in to be profitable, nor how much of the revenue goes to Hulu and how much to the filmmakers. (On the TV side, itas estimated Hulu gets 30 percent to 50 percent.) Hulu did, though, specify the number of ads that had to be in the video based on a formula of a certain number of ads per hour of content. (Darkness has six ad breaks.) The Darkness crew wasnat allowed to increase the ad load to try to make more money. Hulu, as the distributor of a film without corporate backing, was largely in control. (The producers were able to negotiate a certain amount of promotional love from Hulu. In the contract was a stipulation that Hulu promote the film on its movie channel page.)

Just because the movieas model is new doesnat mean it will work. On top of the Hulu cut, the Darkness producers have to also split their ad revenue with IndieFlix, a distribution company that helped them get Darkness on Hulu in the first place. A few weeks from now the movie becomes available on DVD and iTunes, where itas possible the film will make more money than on Hulu. Does that mean the producers should continue to encourage people to watch for free, or do they point them toward the more permanentaand profitableaoptions? Itas a question symptomatic of a filmaand a mediaaindustry that is uncertain about the way forward. Does it care more about audience or profitability?

In that sense In the Darkness is a typical movie. And yet Darkness canat in good conscience be called a “movie”aitas too short. But that doesnat make it a TV showaitas too standalone. Itas far too long to be a digital short. And aWeb videoa does a disservice to a work that carries a certain amount of narrative gravitas. We canat quite call it a amade-for-TV movie,a eitherait wasnat made for TV. Itas partially a amade for onlinea movie, but itall find an afterlife on DVD. Because itas a derivative of things weave already categorized, the movie defies categorization.

Thus I propose that we call In the Darkness a aLong Tail movie.a Its creators are tossing it into the ether, hoping that it catches some buzz. If it does, ad revenue and maybe some DVD purchases will lead to a modest profit. If it doesnat, it still has a chance to break even because it was made on the cheap. The idea of the Long Tail benefiting films isnat new. Netflix (NFLX) is more or less based on that idea. But what makes In the Darkness different is that it was made exclusively for the long tail. Itas not benefiting from it after the fact. It may be short, it may be low-budget, and it may be digital, but itas still a movieaa Long Tail movie.

In the two short months since its announcement, the iPad has been rewiring the Internet, and it hasn’t even been released yet. Sites like CNN, the New York Times, Vimeo, and Flickr have scrambled over the last eight weeks to make their video content viewable on the new magical machine, which doesn’t have the near-ubiquitous Flash plugin. They’ll instead provide their content in the cutting-edge HTML5 standard available in the newest browsers, including the iPad’s Safari browser. Apple has even posted a list to let you know which sites are iPad ready.

Most interesting, though, is that only iPad users can see this newest feature. Even if you’re using the latest, greatest browser on your PC, you’ll still get Flash video instead. Popular tech lecture series TED takes pains to point out that only iPad users will see the HTML5 version of the site.

The reason for this kind of digital discrimination might have something to do with the way HTML5 gives the viewer more power than Flash. By making video as standard and accessible as photos, users can simply right-click a video to save it to their computeramaking it that much easier for someone to download content and repost it elsewhere. That leads to more than just copyright issues. Sites like Hulu can only make money when they know its videos are being played. Saving videos to a hard drive or playing them outside of Huluas site means Hulu canat control and track viewership. That’s why you need to go through them to embed a Hulu clip in your own Web page or blog. That way they can still count the number of views.

Some of the early adopters are hip to the problem. Vimeo is one of the exceptions that lets you watch HTML5 video on your desktop, but they’re doing some trickery deep in their Web site’s code to prevent you from right-clicking your favorite video and hitting “save as” Expect video sites to proceed with similar caution while they figure out how to keep their content on a tight leash.

For two years, Hulu has treated its revenue as a cougar treats her age. Ask what the number is, and youall get a disapproving scoff, as though youave offended by daring to bring it up. And it’s for the best. You donat actually want to know the answer, because once you do, all the intrigue is gone.

Now we know Huluas number. In an exclusive interview with the New York Times, Hulu CEO Jason Kilar revealed that revenue was more than $100 million last year. (This might explain that Kilar buzz cutathe result of a bet about how much money Hulu could make.) Better yet, Kilar says the site can hit that number by early summer. Early summer! The implicationabut not the assuranceabeing that Hulu could double its revenue this year, assuming its ad sales hold up and all the rest.

Revenue is one thing, but profitability is another. The site needs to split its money with the content partners, pay for its data-hosting bills, and keep its own staff paid and relatively pampered. Yet Kilar says Hulu is profitable. Its operating costs can’t be too high.

And yet the murmurings of a subscription model for Hulu persist. Kilar all but admitted one was coming, and the Times speculates we could first see it tied to Huluas forthcoming (but not confirmed) iPad app. But Hulu is profitable! Why does it need to make more money? Because in order for NBC, Fox, and ABC to keep feeding it content, it needs to be a profitable part of their business model. Otherwise, theyall go and start their own sites and services, like weave already seen them begin to do for the iPad. Thus, Hulu has to stay aggressive. A cougar not on the prowl isnat a cougar at all.

And here we thought this iPad-canat-play-Flash thing was a big deal. Netflix (NFLX) and ABC are both coming to the app store with standalone apps that plan to offer all of their full-length content. Thatas every streamable Netflix movie on a wireless, .5 inch thick device that you can take with you wherever you go. Thatas every episode of Lost accessible whenever you want, Hulu app or no. These two apps are yet more examples of how the industry is not ignoring the iPad. CBS has already announced itas making its website friendly to the iPad. (No word yet on whether an app is forthcoming.) And NBC.com video has long been able to stream on the device.

The tally, then, is this: Three of the top four networks and the dominant movie-subscription service in the country are all coming to the iPad. For free. (Youall have to pay for Netflix, of course.) On day one. This should make Hulu very nervous.

The New York Times reports Hulu is working on its own iPad app. (Weall have more on that Times report later.) But it wonat be available on the iPad’s first day and it may not be freeathe Times suggests it will be part of Huluas unannounced subscription model. And yet nearly all of its programmingaexcept the Fox shows, for nowais going to be freely available on the iPad. Likewise, a large percentage of Huluas movies will also be available through Netflix. What, exactly, will be the incentive for people to use Hulu rather than the network apps? Will the video be ad free in exchange for the subscription fee? (The other networksa apps will presumably include ads in the videos.)

This is Huluas crucible as it pushes forward with its mobile strategy. Can it survive as itaand its parent companiesabegin to distribute premium video outside of a traditional computer? In the past, Hulu has been reluctant to leave the confines of the traditional browser, partly because of pressure from NBC, ABC, and Fox, who were nervous themselves. Which makes the current situation ironic. Because Hulu was so slow to start distributing its content, the networks that own the content (and who prevented Hulu from distributing it) have taken matters into their own hands. Itas the kind of sabotage that happens whenever you remove a middle-man. And Hulu, no matter its quality, will always be just that. A distributor, a courier, a site stuck in between content and its audience.

By no means does this mean Hulu is doomed. The networks, remember, got to Web streaming well before Hulu did. But without Hulu, Web video didnat prove that popular. It needed Hulu to collect all the video and host it in one place. Hulu became a word synonymous with streaming video. But that industry has matured now, and the focus is switching back toward the content. The iPad is now the delivery device, not Hulu. At the hypercompetitive intersection of media and tech, there is rarely space for two middle-men.

We know that Hulu has disrupted the way we watch TV. But itas done far less to change the way we watch movies. Thatas because right now the movies on Hulu are incredibly obscure. But that doesnat mean they have to be. Every week Hulucination will keep track of how many movies are on Hulu and how many reviews they have on Netflix (NFLX). Weall chart the results as time goes by to tell you whether Hulu is getting closer to Transformers and further from Thunderbolt and Lightfoot.

Hulu keeps jogging in place, and Hulucination keeps marveling at its lack of progress. Last week, 63 percent of Huluas films were in Netflixas database. This week, itas 63.2 percent, 467 of the 739 movies on Hulu. And of the crop of movies that can be put in your Netflix queue, itas more or less reviewed the same way it was last week. The Hulu-on-Netflix crop rates an average of 2.995 stars, down .005 from last weekas average. The number of reviews is slightly up, to 10,128 rankings on average. 

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