Tag Archives: Netflix

Content Versus Innovation

VHS-cassetteThe entertainment and media industry is not known for its innovation. Left to its own devices we would all be consuming news from broadsheets and a town crier, and digesting shows at the theater. Not too long ago the industry, led by Hollywood heavyweights, was doing its utmost to kill emerging forms of media consumption, such as the video tape cassette and the VCR.

Following numerous regulatory, legal and political skirmishes innovation finally triumphed over entrenched interests, allowing VHS tape, followed by the DVD, to flourish, albeit for a while. This of course paved the way for new forms of distribution — the rise of Blockbuster and a myriad of neighborhood video rental stores.

In a great ironic twist, the likes of Blockbuster failed to recognize signals from the market that without significant and continual innovation their business models would subsequently crumble. Now Netflix and other streaming services have managed to end our weekend visits to the movie rental store.

A fascinating article excerpted below takes a look back at the lengthy, and continuing, fight between the conservative media empires and the market’s constant pull from technological innovation.

[For a fresh perspective on the future of media distribution, see our recent posting here.]

From TechCrunch:

The once iconic video rental giant Blockbuster is shutting down its remaining stores across the country. Netflix, meanwhile, is emerging as the leader in video rental, now primarily through online streaming. But Blockbuster, Netflix and home media consumption (VCR/DVD/Blu-ray) may never have existed at all in their current form if the content industry had been successful in banning or regulating them. In 1983, nearly 30 years before thousands of websites blacked out in protest of SOPA/PIPA, video stores across the country closed in protest against legislation that would bar their market model.

A Look Back

In 1977, the first video-rental store opened. It was 600 square feet and located on Wilshire Boulevard in Los Angeles. George Atkinson, the entrepreneur who decided to launch this idea, charged $50 for an “annual membership” and $100 for a “lifetime membership” but the memberships only allowed people to rent videos for $10 a day. Despite an unusual business model, Atkinson’s store was an enormous success, growing to 42 affiliated stores in fewer than 20 months and resulting in numerous competitors.

In retrospect, Atkinson’s success represented the emergence of an entirely new market: home consumption of paid content. It would become an $18 billion dollar domestic market, and, rather than cannibalize from the existing movie theater market, it would eclipse it and thereby become a massive revenue source for the industry.

Atkinson’s success in 1977 is particularly remarkable as the Sony Betamax (the first VCR) had only gone on sale domestically in 1975 at a cost of $1,400 (which in 2013 U.S. dollars is $6,093). As a comparison, the first DVD player in 1997 cost $1,458 in 2013 dollars and the first Blu-ray player in 2006 cost $1,161 in 2013 dollars. And unlike the DVD and Blu-ray player, it would take eight years, until 1983, for the VCR to reach 10 percent of U.S. television households. Atkinson’s success, and that of his early competitors, was in catering to a market of well under 10 percent of U.S. households.

While many content companies realized this as a massive new revenue stream — e.g. 20th Century Fox buying one video rental company for $7.5 million in 1979 — the content industry lawyers and lobbyists tried to stop the home content market through litigation and regulation.

The content industry sued to ban the sale of the Betamax, the first VCR. This legal strategy was coupled by leveraging the overwhelming firepower of the content industry in Washington. If they lost in court to ban the technology and rental business model, then they would ban the technology and rental business model in Congress.

Litigation Attack

In 1976, the content industry filed suit against Sony, seeking an injunction to prevent the company from “manufacturing, distributing, selling or offering for sale Betamax or Betamax tapes.” Essentially granting this remedy would have banned the VCR for all Americans. The content industry’s motivation behind this suit was largely to deal with individuals recording live television, but the emergence of the rental industry was likely a contributing factor.

While Sony won at the district court level in 1979, in 1981 it lost at the Court of Appeals for the Ninth Circuit where the court found that Sony was liable for copyright infringement by their users — recording broadcast television. The Appellate court ordered the lower court to impose an appropriate remedy, advising in favor of an injunction to block the sale of the Betamax.

And in 1981, under normal circumstances, the VCR would have been banned then and there. Sony faced liability well beyond its net worth, so it may well have been the end of Sony, or at least its U.S. subsidiary, and the end of the VCR. Millions of private citizens could have been liable for damages for copyright infringement for recording television shows for personal use. But Sony appealed this ruling to the Supreme Court.

The Supreme Court is able to take very few cases. For example in 2009, 1.1 percent of petitions for certiorari were granted, and of these approximately 70 percent are cases where there is a conflict among different courts (here there was no conflict). But in 1982, the Supreme Court granted certiorari and agreed to hear the case.

After an oral hearing, the justices took a vote internally, and originally only one of them was persuaded to keep the VCR as legal (but after discussion, the number of justices in favor of the VCR would eventually increase to four).

With five votes in favor of affirming the previous ruling the Betamax (VCR) was to be illegal in the United States (see Justice Blackmun’s papers).

But then, something even more unusual happened – which is why we have the VCR and subsequent technologies: The Supreme Court decided for both sides to re-argue a portion of the case. Under the Burger Court (when he was Chief Justice), this only happened in 2.6 percent of the cases that received oral argument. In the re-argument of the case, a crucial vote switched sides, which resulted in a 5-4 decision in favor of Sony. The VCR was legal. There would be no injunction barring its sale.

The majority opinion characterized the lawsuit as an “unprecedented attempt to impose copyright liability upon the distributors of copying equipment and rejected “[s]uch an expansion of the copyright privilege” as “beyond the limits” given by Congress. The Court even cited Mr. Rogers who testified during the trial:

I have always felt that with the advent of all of this new technology that allows people to tape the ‘Neighborhood’ off-the-air . . . Very frankly, I am opposed to people being programmed by others.

On the absolute narrowest of legal grounds, through a highly unusual legal process (and significant luck), the VCR was saved by one vote at the Supreme Court in 1984.

Regulation Attack

In 1982 legislation was introduced in Congress to give copyright holders the exclusive right to authorize the rental of prerecorded videos. Legislation was reintroduced in 1983, the Consumer Video Sales Rental Act of 1983. This legislation would have allowed the content industry to shut down the rental market, or charge exorbitant fees, by making it a crime to rent out movies purchased commercially. In effect, this legislation would have ended the existing market model of rental stores. With 34 co-sponsors, major lobbyists and significant campaign contributions to support it, this legislation had substantial support at the time.

Video stores saw the Consumer Video Sales Rental Act as an existential threat, and on October 21, 1983, about 30 years before the SOPA/PIPA protests, video stores across the country closed down for several hours in protest. While the 1983 legislation died in committee, the legislation would be reintroduced in 1984. In 1984, similar legislation was enacted, The Record Rental Amendment of 1984, which banned the renting and leasing of music. In 1990, Congress banned the renting of computer software.

But in the face of public backlash from video retailers and customers, Congress did not pass the Consumer Video Sales Rental Act.

At the same time, the movie studios tried to ban the Betamax VCR through legislation. Eventually the content industry decided to support legislation that would require compulsory licensing rather than an outright ban. But such a compulsory licensing scheme would have drastically driven up the costs of video tape players and may have effectively banned the technology (similar regulations did ban other technologies).

For the content industry, banning the technology was a feature, not a bug.

Read the entire article here.

Image: Video Home System (VHS) cassette tape. Courtesy of Wikipedia.

The Benefits of BingeTV

Netflix_logoThe boss of Netflix, Ted Sarandos, is planning to kill you, with kindness. Actually, joy. His plan to recast our consumption of television programming aims to deliver mountains of joyful entertainment in place of the current wasteland of incremental TV-dross punctuated with schlock-TV.

While the plan is still in work, the fruits of Netflix’s labor are becoming apparent — binge-watching is rapidly assuming the momentum of a cultural wave in the US. The super-sized viewing gulp, from say thirteen successive hours of House of Cards or Orange is the New Black, is quickly replacing the national attention deficit disorder enabled by the once anxious and restless trigger finger on the TV-remote, as viewers flip from one mindless show to the next. Yet, by making Netflix into the next great media and entertainment empire Sarandos may be laying the foundation for an unintended, and more important, benefit — lengthening the attention-span of the average adult.

From the Guardian:

Is Ted Sarandos a force for evil? It’s a theory. Consider the evidence. Britain is already a country beset by various health-ruining, bank balance-depleting behaviours – binge-drinking, chain-smoking, overeating, watching football. Since January 2012 when Netflix launched its UK operation, Sarandos, its chief content officer, has created a new demographic of bingeing Britons –1.5 million subscribers who spend £5.99 a month to gorge on TV online.

To get a sense of what the 49-year-old Arizonan is doing to TV culture, imagine that you’ve just finished watching episode five of Joss Whedon’s Firefly on your laptop, courtesy of Netflix. You’ve got places to go, people to meet. But up pops a little box on screen saying the next episode starts in 12 seconds. Five hours later, you dimly realise that you’ve forgotten to pick up your kids from school and/or your boss has texted you 12 times wondering if you’re planning to show up today.

Dooes he feel responsible for creating this binge culture, not just here but across the world (Netflix has 38 million subscribers in 40 countries, who watch about a billion hours of TV shows and films each month), I ask Sarandos when we meet in a London hotel? He laughs. “I love it when it happens that you just have to watch. It only takes that little bit of prodding.”

Sarandos feels it is legitimate to prod the audience so that they can get what they want. Or what he thinks they want. All 13 episodes of, say, political thriller House of Cards with Kevin Spacey, or the same number of prison comedy drama Orange is the New Black with Taylor Schilling, released in one great virtual lump.

Why? “The television business is based on managed dissatisfaction. You’re watching a great television show you’re really wrapped up in? You might get 50 minutes of watching a week and then 18,000 minutes of waiting until the next episode comes along. I’d rather make it all about the joy.”

Sarandos says he got an intimation of the pleasures of binge-viewing as a teenager in Phoenix, Arizona. On Sundays in the mid-70s, he and his family would gather round the telly to watch Mary Hartman, Mary Hartman, a satire on soap operas. “If you worked, the only way could catch up with the five episodes they showed in the week was watching them back to back on Sunday night. So bingeing was already big in my subconscious.”

Years later, Sarandos binged again. “I really loved the Sopranos but didn’t have HBO. So someone would send me tapes of the show with three or four episodes. I would watch one episode and go: ‘Oh my God, I’ve got to watch one more.’ I’d watch the whole tape and champ at the bit for the next one.”

The TV revolution for which Sarandos and Netflix are responsible involves eliminating bit-champing and monetising instant gratification. Netflix has done well from that revolution: its reported net income was $29.5m for the quarter ending 30 June. Profits quintupled compared with the same period in 2012 – in part due to its new UK operation.

Sarandos hasn’t done badly either. He and his wife, former US ambassador Nicole Avant, have a $5.4m Beverly Hills property and recently bought comedian David Spade’s beachside Malibu home for $10.2m. Sarandos argues viewers have long been battling schedulers bent on stopping them seeing what they want, when they want. “Before time shifting, they would use VCRs to collect episodes and view them whenever they wanted. And, more importantly, in whatever doses they wanted. Then DVD box sets and later DVRs made that self-dosing even more sophisticated.”

He began studying how viewers consumed TV while working part-time in a strip-mall video store in the early 1980s. By 30, he was an executive for a company supplying Blockbuster with videos. In 2000, he was hired by Netflix to develop its service posting rental DVDs to customers. “We saw that people would return those discs for TV series very quickly, given they had three hours of programming on them – more quickly than they would a movie. They wanted the next hit.”

Netflix mutated from a DVD-by-post service to an on-demand internet network for films and TV series, and Sarandos found himself cutting deals with traditional TV networks to broadcast shows online a season after they were originally shown, instead of waiting for several years for them to be available for syndication.

Thanks to Netflix and its competitors, the old TV set in the living room is becoming redundant. That living-room fixture has been replaced by a host of mobile surrogates – tablet, laptop, Xbox and even smart phone.

Were that all Sarandos had achieved, he would have been minor player in the idiot box revolution. But a couple of years ago, he decided Netflix should commission its own drama series and release them globally in season-sized bundles. In making that happen, he radically changed not just how but what we watch.

Why bother? “Up till a couple of years ago, a network would make every pilot for a series into a one-off show. I started getting worried, thinking nobody’s going to make series any more, and so we wouldn’t be able to buy them [for Netflix] a season after they’ve been broadcast. So we said maybe we should develop that muscle ourselves.” Sarandos has a $2bn annual content budget, and spends as much as 10% on developing that muscle.

Strikingly, he didn’t spend that money on movies, but TV. Why? “Movies are becoming more global, which is making them less intimate. If you make a movie for the world, you don’t make it for any country.

“I think television is going in the opposite direction – richer characterisation, denser storylines – and so much more like reading a novel. It is a golden age for TV, but only because the best writers and directors increasingly like to work outside Hollywood.” Hence, perhaps, the successes of The Sopranos, The West Wing, The Wire, Downton Abbey, and by this time next year – he hopes – Netflix series such as the Wachowskis’ sci-fi drama Sense 8. TV, if Sarandos has his way, is the new Hollywood.

Netflix’s first foray into original drama came only last year with Lilyhammer, in which Steve Van Zandt, who played mobster Silvio Dante in The Sopranos, reprised his gangster chops as Frank “The Fixer” Tagliano, a mobster starting a new life in Lillehammer, Norway. The whole season of eight episodes was released on Netflix at the same time, delighting those suffering withdrawal symptoms after the end of The Sopranos. A second season is soon to be released.

Sarandos suggests Lilyhammer points the way to a new globalised future for TV drama – more than a fifth of Norway’s population watched the show. “It opened a world of possibilities – mainstream viewing of subtitled programming in the US and releasing in every language and every territory at the exact same moment. To me, that’s what the future will be like.”

Sarandos also tore up another page of the TV rulebook, the one that says each episode of a series must be the same length. “If you watched Arrested Development [the sitcom he recommissioned in May, seven years after it last broadcast] none of those episodes has the same running time – some were 28 minutes, some 47 minutes. I’m saying take as much time as you need to tell the story well. You couldn’t really do that on linear television because you have a grid, commercial breaks and the like.”

House of Cards, his second commissioned drama series whose first season was released in February, even better demonstrates Sarandos’s diabolical genius (if that is what it is). He once described himself as “a human algorithm” for his ability, developed in that Phoenix strip mall, for recommending movies based on a customer’s previous rentals. He did something similar when he commissioned House of Cards.

“It was generated by algorithm,” Sarandos says, grinning. But he’s not entirely joking. “I didn’t use data to make the show, but I used data to determine the potential audience to a level of accuracy very few people can do.”

It worked like this. In 2011, he learned that Hollywood director David Fincher, then working on his movie adaptation of The Girl with the Dragon Tattoo, was pitching his first TV series. Based on a script by Oscar-nominated writer Beau Willimon, it was to be a remake the 1990 BBC series House of Cards, and would star Kevin Spacey as an amoral US senator.

Some networks were sceptical, but Sarandos – not least because he’s a political junkie who loves political thrillers and, along with his wife, helped raise nearly $700m for Obama’s re-election campaign – was tempted. He unleashed his spreadsheets, using Netflix data to determine how many subscribers watched political dramas such as The West Wing or the original House of Cards.

“We’ve been collecting data for a long time. It showed how many Netflix members love The West Wing and the original House of Cards. It also showed who loved David Fincher’s films and Kevin Spacey’s.”

Armed with this data, Sarandos made the biggest gamble of his life. He went to David Fincher’s West Hollywood office and announced he wanted to spend $100m on not one, but two 13-part seasons of House of Cards. Based on his calculations, he says: “I felt that sounded like a pretty safe bet.”

Read the entire article here.

Image: Netflix logo. Courtesy of Wikipedia / Netflix.