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Netflix, friction, societal change and why Hulu has no chance

It was just a few weeks ago that a few of us on MediaShift debated the future of TV distribution based on Hulu’s increasing distribution rights, the premise being that Hulu’s position had strengthened based on library growth. But already, so much has changed.

With the news that Netflix is now available in 130 countries, the distance between #1 and everyone else is increasing dramatically. Neflix now has an “unfair” (to other companies) sustainable competitive advantage that is becoming increasingly self-contained and resistant to competitors.

Lack of Friction

From a consumer perspective, the Netflix service is unmatched not just because of the library, but because of the user experience and the lack of friction. The apps on any device are fast and work better and more consistently across more platforms – so viewers can expect the same quality on whatever device you access the service.  It’s superior to Hulu and HBO Go, the services with which Netflix are most often compared. It’s faster, more fluid and easier to navigate on leading platforms Apple TV, Amazon Fire TV and Roku, Video playback is better and more consistent as well, with HBO Go and Hulu requiring stream restarts every now and then.

More important and less heralded is the lack of friction in content discovery. Netflix carries whole seasons of shows, in chronological order. You won’t find a Season 2 without a Season 1.  Network apps, particularly the authenticated, TV Everywhere variety, often have only the most recent episodes or seasons of a show. They do this to cap residual costs – which is a cutting the nose to spite face product strategy. As a result it is common to find situations like Fargo from FX. You can find Season 2, but not Season 1, on the FX Now apps. But viewers know that Netflix usually carries complete libraries – definitely for its own shows, and often for those it licenses. And for others, you’d never see a Season 2 without a Season 1. It’s a great, predictable experience overall.

This completist strategy of aggregation now carries over internationally. It’s great for viewers and will be powerful for distributors. Distributors, networks and rights holders now have a global subscription distribution platform for the first time, with little little friction. One deal – many markets.

The Netflix moat

The Netflix moat is getting very, very big. It will be very difficult for competitors to mirror all of the things that empower Netflix – the powerful system the company now has in place all working together.

  • Large scale consumer relationship – including identity and billing
  • It’s original content budget is unparalleled – bigger than HBO, Starz, Showtime and Amazon combined. The public markets are funding global growth and a larger library.
  • Global presence. This presence, and therefore the size of the customer base, makes the service very attractive for distributors, further deepening the library.
  • Netflix will be able to grow dramatically in other ways – they are uniquely positioned to explore live events and global sports rights.
  • And the on-demand content library keeps growing.

The scale and cash is already forcing media companies to be on Netflix, even if it is not in their best interest long term, enriching the service and increasing value for viewers.

Furthermore, the ad free subscription model is a huge advantage for Netflix, allowing the service to avoid a global rats’ nest of TV advertising that is still largely not programmatic globally.

Really, only Apple, Amazon, Google/YouTube, Facebook and maybe Baidu could approach this scale.  Of the group, Amazon is best at combining software, content, subscriptions, payments and distribution.

The smaller guys? The networks and other aggregators? Consolidation and closure of new streaming services will happen as quickly in 2016 as they came to life in 2015. Verizon, Sling, Sony, and verticals like Seeso (NBCU comedy) don’t have a chance.  It just won’t make sense to license SNL to Seeso when Netflix can offer so much money. Companies like Disney have already helped dig their own graves by licensing gems like Clone Wars to Netflix instead of retaining the rights themselves. Other big media companies like Time Warner and Fox are pulling out, but it’s too late now. The warchest for original content is built and the large global network is in place. These guys helped Netflix build it. Now the creators underneath the networks, will have to work with Netflix, potentially disintermediating the traditional distributors and the networks too. 20 or even 10 years ago, if you were a storyteller, the only place to was a network with MVPD distribution. That’s all changed.

As Reed Hastings says in this Re/code interview:

“In the long term, the producer/developer was going to be the distributor. We’ve understood that for a long time.”

Binging and Chilling

We see something happening more deeply with Netflix, as the service has become so deeply engrained in the culture. Viewers have developed well-documented habits and expectations as a result of the experience. Viewing can be bingy or serially monogamous. Instead of watching a matrix of network TV, people seem (anecdotally) to be watching 1-3 things intensely until they finish a show and ask “what should I watch next?” The water color is an asynchronous reddit feed and blog recaps. Viewing habits and cultural norms have changed.

Using Stewart Brand’s Pace Layer model for studying societal change, one can argue that Netflix has passed through the faster moving Fashion, Commerce and Infrastructure layers and has taken root in the slower moving layer of Cultural Change. Companies at this layer are able to build ongoing sustainable competitive advantage that is “unfair” to competitors.

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Over 50 million subscribers in (now) 130 countries may be a powerful engine for a business, but once your service inspires a meme and the Halloween costume of the year your cultural significance and impact run deep. It’s hard to compete.