Digital Technologies Chapter 4

Why is the First Sale Doctrine (including understanding where it does and does not apply) relevant to Netflix?

-It means content acquisition costs for DVDs are more predictable than streaming costs -In cases of streaming media, it facilitates a shift of bargaining power to content suppliers

Growing Difficulty of Content Acquisition

-Some firms steadfastly refuse to offer Netflix streaming rights -content acquisition has proven significantly more difficult, and more costly, than buying DVDs and stacking them in a remote warehouse -difference has forced Netflix to shift from offering the longest tail to a long-enough tail

Which are considered "bits" businesses (vs. "atoms" businesses)?

-Spotify -Craigslist

Which of the following was cited as a critical competitive asset that Netflix built to dominate DVD-by-mail?

-brand -scale -data

A/B Test

A randomized group of experiments used to collect data and compare performance among two options studied (A and B) -particularly easy to run over the internet

The "success rate" of Netflix shows is thought to be greater than conventional TV

True

Fixed Costs

costs that don't vary according to production volume -buying land or a manufacturing plant

Long Tail

refers to an extremely large selection of content or products -is a phenomenon where firms can make money by offering a near endless selection -selection attracts customers, and the Internet allows large-selection inventory efficiencies that offline firms can't match

Churn Rate

the rate at which customers leave a product or service -Netflix churn rate fell after a copy cat efforts

Monolithic Architecture

where a single large computer program handles the firms business needs

The phrase ____________ is often used to describe Netflix competing with Amazon while also using its cloud services.

-Coopetition -Frenemies

________________ refers to removing an organization from a firm's distribution channel.

-Disintermediation

Which of the following was cited as a reason for Netflix 2019 share price drop?

-Disney announced a cheaper streaming service -A miss on expected subscriber growth -A drop in US subscribers -Diluted stock price from a new share issue

March to Global Dominance

-Global expansion plays a key role in the Netflix drive for scale-driven dominance -this is complicated by other global/international streaming services (Claro Video, Sky NOW TV, LOVEFiLM, Canal Plus) --> some Netflix content is locked up by these companies **Netflix's international segment turned an annual profit in 2017, and international subscribers now make up more than half the firm's user base

Netflix Corporate Culture

-Netflix Culture: Freedom & Responsibility, "the most important document ever to come out of the Valley" -all Netflix employee compensation vests immediately -no vacation policy -Employees at Netflix are among the highest paid in Silicon Valley

Getting Netflix Everywhere

-Netflix was originally still only streaming on PCs -Some people within Netflix developed a set top box but many people wouldn't have wanted to buy one **The firm developed a software platform and makes this available to manufacturers seeking to include Netflix access in their devices

Bidding Against Rivals

-Netflix will have to bid against deep-pocketed rivals in order to secure their exclusive content (a highly differentiated good)

Which of the following was seen as a problem with Quikster?

-Not giving customers enough advanced warning of the change -Imposing a more complex mechanism to use Netflix services

Identify factors that give studios supplier power:

-They offer highly differentiated goods -There are an increasing number of buyers -The first sale doctrine means that buyers can not reproduce and redistribute their content

Which of the following is/are reason(s) artists prefer Netflix to conventional TV offerings?

-Willingness to air an entire season, potentially allowing it to build an audience over time without the midseason cancellation risk -Binge watching is more conducive to complex storytelling -Unrestricted by traditional episodic time formats -Willingness to make content closer to Hollywood area talent

Key Resources for Advantage

-brand -scale --> distribution centers, customers, selection -data/switching costs

Netflix Original Content

-can counter rivals with exclusive content of its own -Netflix has brought scores of feature-length movies to market. It's estimated that Netflix has backed over 1,000 original programs, and it's not uncommon for the firm to release as many as sixty originals a month. -Stranger Things, 13 Reasons Why, Mindhunter, GLOW, The Crown, and Unbreakable Kimmy Schmidt -Netflix doesn't own all of the programming of their originals --> House of Cards and Orange is the New Black -the firm has begun to do deals for complete ownership of new content. Now, about 85% of all new spending on content goes toward original programming -credits this for subscriber growth and increased customer engagement and reduced customer churn

Netflix Problems

-debt and related statistics on its cash burn and growing obligations are already among the worst of any firm in Silicon Valley, and trending in the wrong direction -binge-watching and the rise of must-see content across an increasing number of services might prompt users to subscribe and unsubscribe

Blockbuster and Walmart

-discovered their strong consumer awareness didn't translate to any advantage when competing with Netflix -Hastings's early market entry and effective execution made Netflix the first firm consumers thought of

Netflix View on Scale Advantage

-doesn't just see growth as a way to advance profitability; it sees it as a vital competitive asset to keep competitors at bay

Streaming Frees Creative Contraints

-episodes don't have to be a certain length -there doesn't have to be a certain format to the show/movie

Content Delivery Network

-firms that Netflix could hire to distribute its content at caching locations close to users -Netflix has such a high volume of traffic that scattering its own special-purpose servers around the globe helps keep a fast film flow while holding costs limbo-low (Open Connect)

Netflix Scale Advantages

-gained relevant scale greater than Walmart and Blockbuster by building and leveraging an asset that neither competitor had: a nationwide network of fifty-eight highly automated distribution centers that collectively could deliver DVDs overnight to some 97 percent of the US population.

Netflix's Generosity

-gives away a huge portion of software that its team has developed -Intel and eBay are among the multibillion-dollar firms leveraging Netflix software, and the Obama campaign

What did Netflix co-founder & CEO Reed Hastings say was his "biggest strategic regret"?

-going public too early

Netflix DVD by Mail

-had 19.5 million DVD subscribers, but the number had fallen to 2.7 million by 2019 -Margins too sweet to warrant a shutdown are helped by innovations, such as a custom sorting machine that operates five times more efficiently than prior worker-heavy efforts.

Hastings Comments About Streaming Service

-said it would be underwhelming -not enough content for streaming -no way to get the content to the TV

Marginal Costs of Digital Technology

-some say that the marginal costs are zero because you can use the internet to reach anyone and can make limitless duplicates of content --> they are only zero for content owners -there are some costs which are paying providers to connect them to the internet or running programs on the servers of other companies

__________________ refers to a phenomenon whereby firms can make money by offering a near-limitless selection of products, many of which are not especially popular on their own.

-the long tail

Netflix Rivals

-threat is from firms that having thriving businesses in other areas -Amazon taking loses to gain more ground in the industry

How can Netflix use its data asset?

-to make more accurate recommendations -improve user interface design -help the firm determine the appropriate cost for acquiring content -to shape creative decisions in original program offerings

Netflix and Other Studios

-used Cinematch to find viewers for back catalog movies and TV shows -developed a revenue-sharing system where studios could offer Netflix their DVD catalog at a wholesale price in exchange for a cut of Netflix subscriber revenues each time someone requests a given DVD -huge for studios because they didn't have to market

Streaming and the Data Asset

-uses this data asset to make more accurate recommendations, improve user interface design, and help the firm determine the appropriate cost for acquiring content, and it can even shape creative decisions in original program offerings -Every recent click, view, review, early abandon, and guide page view, as well as other data, is considered in order to identify the content the firm believes users will most likely want to see **Some 75 to 80 percent of what people watch on the service comes from Netflix recommendations, not search -helps the firm determine just how much a given asset is worth, and it directly informs decisions on choosing projects and setting budgets. -informs the original content investments that Netflix is making -to create ultratailored audience promotions

How does Netflix Run

-using AWS has enabled Netflix to grow its services by millions of customers without adding any data center capacity since 2008 -Netflix is the biggest AWS customer, drawing "many tens of thousands" of servers at a time

Which of the following does Netflix consider part of its competition?

-video games -magazines -surfing the web -channel surfing -watching a DVD -buying a pay-per-view movie -Hulu and Amazon Prime Video

First Sale Doctrine

A US Supreme Court ruling stating that an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display or otherwise dispose of that particular copy, notwithstanding the interests of the copyright owner -For Netflix this means that if studios sell their DVDs retail, they can't prevent Netflix or anyone else from buying DVDs at full price and distributing the discs to others **this doesn't apply to streaming and Netflix needs to license shows and movies

______________________ refers to a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience.

Collaborative Filtering

Match the media property with its parent company.

ESPN --> Disney Nickelodeon --> CBS HBO --> AT&T Universal Studios --> Comcast

Buying DVDs would be a fixed cost.

False

Companies seek a higher rate of subscriber churn.

False

Despite Netflix success it still needs to gain more subscribers if it is to surpass viewership of traditional networks like ABC and NBC, or even pay TVs HBO

False

Fortunately for Netflix, other firms are required to offer it rights to their movies, even at a high price Netflix won't accept, otherwise they risk being brought up on antitrust charges

False

Netflix did not have scale advantages when competing against Walmart because Walmart was Fortune 1, the nations biggest firm by sales.

False

Netflix gains no advantage from original content when moving into more global markets.

False

Netflix has a longer tail of content offerings in streaming than in DVD by mail

False

The marginal cost for digital goods is essentially infinite.

False

What was significant about Black Mirror - Bandersnatch?

It was an "interactive" story, allowing viewers to determine actions taken in the film

APIs have helped Netflix become available on more platforms

True

Book publishers selling hard cover books at a higher price for an initial period of time before offering cheaper paperbacks would be an example of windowing

True

Building a plant is considered to be a fixed cost

True

Despite Netflix investment in new content, in 2019, the most popular show on Netflix was The Office

True

Most Netflix viewer selections come from, recommendations, not search.

True

Netflix does not own House of Cards

True

Netflix is not at risk by contributing open source software because its advantages aren't based on the exclusive use of these products

True

The cost to build and run a DVD delivery infrastructure should be the same for all market participants. The factor determining economies of scale is the scale/size of the subscriber base.

True

The cost to produce a movie is a fixed cost.

True

Transfer pricing means AT&T must account for the price its HBO division pays to stream content from films released by Warner based on its DC Comics brand

True

Collaborative Filtering

a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience -Cinematch --> Netflix's recommendation system -Netflix recommendations make up the majority of what people watch

Bandwidth Caps

a limit imposed by the ISP on the total amount of traffic that a given subscriber can consume -if bandwidth is capped, then consumers might pay a penalty (or pay more) just for being Netflix customers -some worry that a loss of net neutrality will hurt entrepreneurship and innovation since only the largest players will be able to pay for the best access

Decision Fatigue

a phenomenon where consumers avoid selection decisions with an overwhelming number of choices -Consumers often turn to trusted or familiar content when the don't know what to watch

Long Enough Tail

a service that might not have all of what you want but that consistently has something for everyone

Microservices Architecture

a system of over 700 smaller programs that control their own resources -each one publishes an API so each one knows what to do -this system allows Netflix perform thousands of production-release software updates each day - yes, thousands - allowing the firm to constantly tweak its systems with efficiency, reliability, and predictive strength.

Awareness

built through advertising

Brand

built through customer experience -this is especially critical online

Marginal Costs

costs associated with each individual unit -parts, materials, labor, energy used to produce each individual car

Content Ownership

fixed costs that don't need to be repeated

Reed Hasting's Biggest Regret

going public too early -once it did this it had to release its financial position which attracted the attention of Blockbuster and Walmart

Video COntent

is perfectly differentiated

Windowing

making content available to a given distribution channel for a specified time window, usually under a different revenue model -in theaters, through hospitality channels like hotels and airlines, on DVD, via pay-per-view, via pay cable, and later broadcast on commercial TV -hardcovers and paper backs

Licensing

marginal costs that need to be repeated for offering more product in the future

Colocation Facilities

provides a place where the gear from multiple firms can come together and where the peering of Internet Traffic can take place -equipment connecting in colos could be high-speed lines from ISPs, telecom lines from large private data centers, or even servers hosted in a colo to be closer to high-speed Internet connections.

Disintermedation

removing an organization from a firms distribution channel -collapses the path between supplier and customer -studios don't need to share revenue with third parties; they can keep all the money generated through new windows -if a studio goes directly to consumers, then studios get to collect and keep a potentially valuable data asset.

Coopetition or Frenemies

situation where firms may both cooperate and compete with one another -Netflix uses computers through Amazon's cloud to deliver streaming video

Transfer Pricing

the price paid when divisions of the same company transact with eachother -important for accounting reasons - the firm might need to pay partners

Net Neutrality

the principle that all internet traffic should be treated equally and that ISPs should not discriminate, slow down access, or charge differently by user, platform, content, site, or modes of communication -Netflix has cut deals with Comcast and Verizon to connect directly to their networks to improve streaming performance

Binge Watching

viewing several episodes of a program in a single sitting

Netflix Overall Goal

want people to click on Netflix rather than play a video game or watch anything on another site

Qwikster Debacle

- the $10 base Netflix service was unbundled into two separate $8 plans: one for DVD-by-mail and one for streaming over the Internet. - for customers with bpth of these plans there was a 60% price hike -The unpopular price hikes were followed by changes that would have actually made the firm's products harder to use by forcing customers to access two different websites, each with a separate database of offerings - At the time of the rebranding announcement, Netflix had secured the domain Qwikster.com, but not the Twitter handle @Qwikster - Over the course of ninety nightmarish days, Netflix lost over 800,000 customers, its stock tumbled from $304 a share to below $75 (eventually falling to near $50), and its market value shed over $12 billion, including $2.3 billion in a single day.