Burning at Both Ends

Anyone who has read this blog in the past (thanks, Mom!) knows that I’m a fan of Netflix as well as the Fox Network show Arrested Development. Today, Netflix announced that it is going to be bringing back Arrested Development in 2012 exclusively to their streaming video service; firmly placing them in the category of a premium cable channel. I’m also a fan of Apple and Amazon, who along with Netflix, are businesses which represent the future of the entertainment industry and media consumption, though in significantly different ways.

Jon Gruber stated the other day that he didn’t think Netflix was capable of creating hardware to support an “end-to-end solution.” I don’t disagree that there’s essentially no chance Netflix will move beyond the app business and into actual hardware1. But I disagree with the notion that Apple and Amazon are providing end-to-end solutions. In fact, what Apple and Amazon are really providing are middle-to-one-end solutions. That is, they take content licensed from a studio and serve it over their systems to their hardware2. Netflix, however, is moving to the other end by creating content to serve on their systems to someone else’s hardware platform via an app. In doing so, they get a wider installed base with no hardware investment (which no one other than Apple has really yet to crack; though the Kindle Fire from Amazon is just a week old).

Netflix has dabbled with being a studio in the past, or at least a financier of independent film. Their folded Red Envelope Entertainment—which backed some really great indie films—was a worthy try, but competed against some of their bread & butter content providers. While that fact hasn’t changed much, the stakes have. When Netflix made the decision to close their Red Envelope Entertainment division, the Apple App Store had just launched and the iPad hadn’t even been announced yet. That landscape has completely changed, with premium network HBO having a really terrific app now that lets subscribers watch their shows on demand. The ability to watch Game of Thrones anytime, anywhere has surely helped HBO’s subscriber numbers and I think this is what Netflix must have it’s eye on.

The price of Netflix’s streaming service puts in the range with HBO and now Netflix has the killer content which will compel fans to sign up if they weren’t already subscribers. Thus they stand a chance to gain subscribers at the expense of premium cable providers like HBO, especially among the growing number of cable-cutters (you don’t need a cable subscription to watch Netflix shows; you do for HBO’s).

So, which is a better business to be in between hardware and content producer? I honestly don’t know, but given the nightmare of content licenses all these tech companies are having to navigate, I have a good feeling that producing premium content might be more as appealing as getting into the hardware game. Though the markets for iPads is essentially the same age as the market for streaming video apps on such devices, the playing field among studios looks a lot more leve than having to taken on a juggernaut like Apple’s iOS devices from scratch.

You’re move, Amazon.

  1. This is the company that is racing to dump physical media, for one thing! []
  2. Note that, in the case of Amazon’s print publishing, they are consuming the entire business between author an reader. Now that is as much an end-to-end solution as one could have, short of providing advances to authors. []

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