Thursday, January 3, 2008

Netflix: Adapting to the Network Era

It is always refreshing when we see a company adapting its business model to new requirements. NetFlix is one of those companies whose business model of DVD distribution through mail-order is under attack. It has taken proactive steps to adapt its business model top the network era.

The following moves are noteworthy signals of the shift underway.

1. On November 29, 2007, Netflix and NBC Universal entered into an agreement about the hit series Heroes.

The deal follows NBC Universal's announcement with G4 and Mojo as the off-network cable homes for "Heroes" and makes Netflix the exclusive SVOD outlet for the series and the third arm of the studio's syndication deal. In addition, Netflix also offers prior season episodes of other popular NBC series including "30 Rock," "Friday Night Lights" and "The Office." For these shows, Netflix subscribers will have the option of enjoying them on DVD or watching them instantly on their PCs at "We are pleased to expand our relationship with NBC Universal Domestic Television Distribution and be part of their innovative distribution strategy," said Robert Kyncl, Vice President of Content Acquisition for Netflix. "We have a shared interest in granting fans expanded access to and strengthening the network's key franchises." "We are excited to establish Netflix as a part of our off-network syndication strategy for 'Heroes,'" said Frances Manfredi, Executive Vice President & General Sales Manager, NBC Universal Domestic Television Distribution. "This deal reflects the changing landscape of the entertainment marketplace and our objective of finding new buyers that complement our traditional customers."

2. On January 3, 2008, it entered into an agreement with LG Electronics to "develop a set-top box for consumers to stream movies and other programming from the Internet to HDTVs -- bypassing the need to use a personal computer." According to Netflix, this "technology collaboration supports the Netflix core strategy of offering a multi-dimensional, or "hybrid," service that gives its more than 7 million members a variety of ways to receive movies and TV series for one, low monthly fee."

According to an article in the New York Times, "the deal with LG is something of a strategy shift for Netflix. The company had been experimenting with building its own Netflix-brand set-top box. Last spring, to help create the device, the company hired Anthony Wood, the founder of ReplayTV and a pioneer of the digital video recorder." I for one agree that it does not make sense to create a specifically branded set top box and compete against Motorola and Cisco. It is far better to figure out a hook to the television sets directly. In that sense, this experiment with LG Electronics is a good way to experiment and learn.


Netflix is experimenting with on-line streaming as well as rethinking how it delivers content to consumers. Strategic shift to a network era is challenging and complex. Wal-Mart experimented with online downloading but scrapped its initiative, partly because its technology partner Hewlett Packard decided to discontinue essential infrastructure for the service. Whatever be the real reason, Wal-Mart has decided to focus on maintaining its leadership in selling physical DVDs and not expand its strategy to online downloads (that call for entirely different set of capabilities and relationships).

The only way to succeed is to explore multiple avenues and experiment plausible avenues of new business models. While, we cannot be certain that Netflix will succeed, the good news is that they have recognized the potential obsolescence of their traditional business models and are responding to the shift.

The transformation in the media network is underway and the moves by current players and new entrants are worth watching.

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