Netflix and the self-inflicted demise of major media

Netflix and the self-inflicted demise of major media

BY JAMES ROBINSON 
ON FEBRUARY 3, 2014

Ken Auletta’s profile of Netflix founder and CEO Reed Hastings in the latest edition of the New Yorker starts with a revealing tidbit.

Back in the heady days of 2000, Netflix had 300,000 subscribers. Hastings had a vision even then that films would one day be streamed cheaply over the Internet. But that future was not there yet. The company was losing money. Hastings flew to Dallas and met with Blockbuster, offering them 49 percent of the company. Netflix would become blockbuster.com and be Blockbuster’s online video division.

Blockbuster weren’t interested. At that time, they didn’t see a threat from digital media.

The previous year Blockbuster’s IPO valued the company at $4.8 billion. Two years after turning down Netflix it posted a $1.6 billion loss. Netflix posted its first profit in 2003, the year before Blockbuster entered into the online DVD market. While Netflix became a cultural behemoth, Blockbuster flagged in value: worth $500 in million in 2006, $24 million in 2010 when it filed for bankruptcy.

Oh, how things could’ve been different. No “House of Cards”! No “Orange is the New Black”! (Maybe.) And while in 2000, the dot-com bubble had just burst it wasn’t like the Internet wasn’t already a thing. Video over the Internet was not a user-friendly proposition but it if you looked around the cultural landscape and projected out current technological trends, it wasn’t inconceivable.

For one, the music industry and Napster were already engaged in what would become a 12-round bare knuckle brawl over peer-to-peer music sharing. Blockbuster weren’t alone in its staggering short-sightedness.

Radio stations began streaming transmission over the Internet in 1994. RealAudio launched in 1995, signalling the birth of online music streaming. Scour, Winamp, Hotline and MP3.com were around by 1997. All of course, leading into the advent of Napster in 1999.

While this was happening, the music industry was lobbying to have the Digital Millenium Copyright Act passed and taking part in the Secure Digital Music Initiative, all in the name of having a legal framework to punish copyright violators and having a universal standard for digital rights management.

Of course, while they were doing that, the situation with Napster and the proliferation of file sharing got so far past the industry that it has spent over a decade playing catch up.

There’s a great scene in Brad Stone’s book The Everything Store about Jeff Bezos and the rise of Amazon. It’s a version of Hastings’ story, but from the opposite angle.

In 1997 then Barnes & Noble CEO Len Riggio called Bezos and asked for a meeting. His company had $2 billion in annual revenue, Amazon had $16 million. Riggio flew out from New York to Seattle and over steaks told Bezos that his company was going to launch a website soon and crush Amazon, but because he respected what Amazon had done to date they might consider partnering up. Bezos declined, so Barnes & Noble did set about launching its own site – which was allegedly going to be called Book Predator until colleagues convinced Riggio otherwise – but it took too many months to launch, allowing Amazon to innovate right past it.

Today, Blockbuster is done. Barnes & Noble’s market dominance is gone and the company bled money in 2013 while Jeff Bezos contemplated a fleet of drones delivering his books to consumers. The American music industry has lost almost 50 percent of its value in 15 years. When the situation got away from them all and the future happened, they were all too quick to turn around and complain about it. The wounds were self inflicted. In the last half of the 90s, the very executives tasked with protecting and preparing their companies looked out at what was coming for them and failed to see the threat to their dominance.

Hastings’ story in the New Yorker serves as another reminder that the major media companies who’ve struggled bitterly to adapt to doing business in the digital era weren’t felled by an unseen force, they dropped the ball and innovation happened without them.

In Auletta’s New Yorker profile of Hastings, the Netflix CEO says that if Blockbuster had set up online even two years earlier than it had it would have put his company under.

So to hear Dish CEO Joseph Clayton – the head of Blockbuster’s new corporate owner –  say in November 2013 that closing the chain was hard but “consumer demand is clearly moving to digital distribution of video entertainment” it is like seeing someone state the obvious five years too late. The price of this clumsiness was obsolescence and bankruptcy. Deservedly so.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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