Monday, May 12, 2008
Will the success of the pioneering DVD-rental company convince a reluctant music industry to embrace its own subscription strategy?
Jun 6, 2002 | John Andrews first heard about Netflix when his class at Harvard Business School studied the company in 2001. But it wasn't the business model that persuaded him to sign up for the service, in which people register online and pay $20 a month for a rotating crop of DVD rentals that arrive by mail. He simply thought a Netflix subscription would make his movie-watching activities more convenient -- and he has yet to doubt his initial hunch.
"I like that I can go online when I think of a movie I want to see and I can add it to my queue," he says. "Or if I'm not sure what I want to see -- I've been trying to catch up on classics; I just returned 'A Streetcar Named Desire' -- I can go to 'genre' and search for ideas of what I'd like to watch. The service works far better than walking into a video store and looking at the new releases."
Andrews' enthusiasm seems to be contagious. In the midst of a pronounced technology slump, Netflix has become the rarest of all Silicon Valley breeds: a rising dot-com star. The Los Gatos company has netted more than 600,000 subscribers since launching in April 1998. On May 23 Netflix raised $80 million in one of the most successful initial public offerings (IPOs) of 2002.
A combination of luck and savvy is goosing the company along. Sales of DVD players began to take off just as Netflix switched to a subscription service in late 2000, and Hollywood studios signed deals with the company at about the same time, in order to balance the growing power of Blockbuster. Consumers, tired of paying late fees and enthralled with their new DVD players -- 35 million have been sold to date -- welcomed the idea of a service that lets you hold on to a movie until you watch it.
Netflix also benefited, digital media experts argue, from its uncanny ability to shift entertainment consumer behavior toward a service and away from traditional systems in which people buy or rent a single piece of entertainment for a specific period of time. Netflix, with its focus on flexibility, comprehensiveness and ease of use, has essentially persuaded consumers to accept a system of eternal borrowing. Call it faux ownership. Netflix subscribers pay about $20 a month for the right to hold on to DVDs for as long as they want; to watch movies over and over again without paying extra fees. The only limitation is that they can't hold on to more than their allotted number. To get a new DVD, they have to send back an old one.
And here's where the Netflix story could get really interesting. If Netflix's success continues, experts argue, it would be the first online entertainment company to earn both a profit and a rabid following. As such, it might offer a model that other entertainment companies could follow -- especially the music industry. If Netflix's convenience, portability and price attract millions of people and make millions of dollars, why can't the idea of faux ownership catch on in the world of digital music?
The music business already has its toes in the water, having launched several subscription services that are essentially jukebox rental systems. But fearing the cannibalization of their billion-dollar CD business, record companies have moved cautiously, bogging down their offerings with complex protection schemes that put off potential users.
Could Netflix be the catalyst that finally forces the music business to embrace real change? A runaway subscription success might persuade entertainment industry moguls to let go of copy protection, while persuading consumers to accept flexible borrowing rather than collecting. EMusic -- a subscription service offering MP3s from independent labels, without copy protection -- is already paying close attention to the Netflix model. And music lovers, particularly those who love Netflix, seem more willing than ever to embrace a flexible subscription model.
"It could work," says Andrews, who is now a consultant at DeLoitte Touche Tohmatsu. "It would have to have a substantially larger queue. But I have a ton of music that I've downloaded, mostly from Napster, and I've got this one playlist that I put on whenever I'm home. If I could always easily go in and swap out 10 or more old songs and insert new ones, and if I could take them wherever I wanted, that would definitely hold some value."
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