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Wednesday, 20 September 2006 |
By D. W. O'Dell
 True paradigm shifts are rare in business. Jeff Bezos was mocked when he created Amazon; who would want to buy a book without holding it in your hands first? An MBA student turned in an assignment to create a business model and was given a poor grade, with a note from the professor to next time try to come up with a plan that was workable; that MBA student turned that business plan into FedEx (or UPS - I forget the details of the story, but you get the idea). The professor is probably still grading papers and telling students what is and isn’t possible based upon his vast experience as a tenured professor.
Netflix represents a sort of domino paradigm shift. First, there was the shift from videos to DVDs. For a while, not much changed. Blockbuster continued to stock 100 copies of Happy Gilmore the week it was released, while their Ingmar Bergman shelf remained somewhat thin. There was, however, one initial shift that went almost unnoticed: the battle over aspect ratio. Blockbuster had tried to discourage people from requesting widescreen format, steering them towards full screen. Why? Presumably there were enough morons who complained about the black bars at the top and bottom of their TV screens to flummox Blockbuster's crack staff, so full screen was preferred (Roger Ebert correctly pointed out at the time that when everyone converts to widescreen TVs, full screen videos will have black bars on the left and right). With the advent of DVDs, full screen “pan and scan” faded away, and everyone was watching films in the proper aspect ratio. Chalk one up for the good guys.
But eventually someone noticed that DVDs were different than videos, and not just because of clearer picture and smaller size. People rented a video, watched the film, and then returned it to Blockbuster before the 48-hour due date. People who rented DVDs watched the movie...then they watched the director’s commentary track, then the writer’s commentary track, then the making of featurette, the deleted scenes, the deleted scenes with director’s commentary, the featurette on special effects.... Suddenly the two-day due date was looking a bit cramped.
Enter Netflix. In many ways it was the anti-Blockbuster. Where Blockbuster guaranteed you access to the latest hit, Netflix couldn’t assure you that you would get the film you wanted. Where Blockbuster focused on recent releases, Netflix built a library of classics, silent films, foreign films, TV series DVDs, etc. Where Blockbuster’s business depended on you returning the film ASAP, Netflix made more profit if you didn't return the DVD quickly.
Let’s say you are in the three DVDs at a time for $19.99 a month package. Assuming a two day turn around on DVDs (true in most parts of the country), you could rent a maximum of 45 DVDs a month. It costs Netflix 78 cents per film rented, 39 cents to mail it to you, 39 for the return postage. That makes the break even point $20/78 cents equals 25 DVDs per month. If you watch and return 25 DVDs in a month, Netflix makes 49 cents profit (25 x $0.78 = $19.50). Rent 26 DVDs and they are 29 cents in the red. Of course I’m not considering their other costs.
So Netflix wants you to enjoy your DVDs as fully as possible. Blockbuster still wants it back as soon as possible, although thanks to competition Blockbuster has had to takes steps towards a “no late fee” policy. This got off to a rocky start when some Blockbusters eliminated “late fees” but hit customers with a “restocking fee” if the DVD was brought back after the due date. Given the percent of Blockbuster revenue accrued through late fees, losing that profit center must have been as difficult as Scrooge giving a piggy-back ride to Tiny Tim before the ghosts came.
Throw in that Blockbuster was committed to maintaining stores where they had to pay rent, paying employees to be personable to customers, and buying 100 copies of the latest releases every week, they were at a serious disadvantage. It looked like game, set, match Netflix.
But recently there have been a few articles in the media asking if Netflix has been too successful. Customers are reportedly becoming dissatisfied when they experience “Netflix guilt,” a condition brought on by getting some high-falutin’ picture and then being unable to watch it. People rent Crash, or Brokeback Mountain, or Fanny and Alexander meaning to watch them, but then they are never quite in the right mood. So the DVD sits on their TV for months, eventually costing them as much in forgone rentals as they would have spent to buy the film.
A second potential problem for Netflix is the phenomenon called “the paradox of choice.” There was a widely reported study by Iyengar and Lepper where people in grocery stores were given the option of buying what was called a new brand of jam; in some cases the participants had four varieties of jam to choose from, in others there were 16 varieties. People that had four options decided to buy 30% more jam than those with 16 options. Why? If there are too many choices, some people find it easier to simply not choose.
Could this happen to Netflix? Are there people out there who would sign up, but then be so intimidated at the prospect of having access to every movie and TV show released on DVD that they quit? Would the idea that you had to rank-order your preferences further complicate matters (“Hmm, should I put Citizen Kane at number 1, or Weekend at Bernies? Do I want to see The Third Man, or American Pie 4: The Casserole next? I’m so confused....”)?
If enough people recognize the symptoms of “Netflix guilt,” or become confused by all the DVDs available, they may stop subscribing to Netflix and return to Blockbuster. I’m not going to worry too much about that, though. It’s all part of a sifting process; people who are cinephiles (or, if you prefer, cineastes) will always be willing to watch whatever is in their queue and will want to keep DVDs as long as possible to enjoy all the features. Some people may join Netflix and then discover that they want to choose what movie they will watch on Saturday night, and that they mean to watch Crash but will end up viewing the latest in the film oeuvre of Mr. Adam Sandler.
In the meantime, I will continue to enjoy my Netflix selections during the dog days of television, although I know I’ll never be so bored that I’ll be able to zip through 26 DVDs in a month.
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