Great Debate: Will Netflix emerge from its big collapse a long-term winner?

Summary:Will Netflix emerge from its big collapse a long-term winner? Steven J. Vaughan-Nichols sees big gains ahead. Christopher Dawson sees more pain.

Steven J. Vaughan-Nichols

Steven J. Vaughan-Nichols

Yes: Big gain

or

No: More pain

Christopher Dawson

Christopher Dawson

Best Argument: Yes: Big gain

The moderator has delivered a final verdict.

Opening Statements

Netflix will be a winner despite itself

Steven J. Vaughan-Nichols: Has Netflix made some really dumb moves? You betcha. The combination of a big increase in rates with the bone-headed move of trying to split its video service into two lead to the company losing 800,000 subscribers. But, even after this fiasco Netflix will still end up a winner.

Why? Because even with Google exploring commercial video on YouTube, upstarts like Crackle and CinemaNow, and Hulu and individual networks moving content online, and its CEO's burst of idiocy, Netflix still has 28-million paying customers. They don't.

With the exception of the Apple TV, every device out there that plays Internet video—DVRs, DVD players, tablets, Roku Streaming Player—come ready to play Netflix video. So, besides Netflix's customer base, Netflix also has the best hardware penetration. There's a reason why Netflix alone takes up more Internet bandwidth than any other Internet service. Note, I said “Internet service” not video service.

The simple truth is that Netflix still doesn't have any real competition.

Netflix: More Pain Ahead

Christopher Dawson: Netflix, once the darling of both consumers and the tech industry, has made a series of critical missteps this year that have seen it fall from favor almost as quickly on Wall Street as it has with consumers.
 
Why shouldn't we be surprised? Because the way we consume media is changing very quickly. Netflix is no longer the only game in town as Apple, Amazon and Google solidify their ecosystems, while upstarts like Crackle continue to innovate and drive prices downward.
 
Netflix has admitted that its DVD rental service's high margins and competitive pressures from the likes of Redbox will limit growth in that space, as will changing market dynamics.

There is simply too much money to be made and too much technology ready for the viewing for startups not to enter the fray and further degrade Netflix' position.
 
It will be a long, painful death, but Netflix is headed nowhere but down.

The Rebuttal

  • Great Debate Moderator

    Will customers get over Netflix's pricing changes, screwups?

    Thoughts?

    Posted by Lawrence Dignan

    Eventually

    But, Netflix should have done a better job of explaining what they were doing with the pricing changes. And, as for the rest, it would have been nice if they were to offer users a few free DVD rental months or the like to make up for their foul-ups.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Yes, but it doesn't matter

    They've lost momentum at a critical time. It's too late to fix what's gone wrong, no matter how short people's memories are.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Unwinding DVDs

    Can Netflix unwind the DVD by mail service constructively? Much like AOL is doing with dial-up service (yes it still has those).

    Posted by Lawrence Dignan

    Sure

    In fact, they need to keep it going for years more. Listen, I watch Internet video on my TV all the time. But, there's a lot of content you can only still get on DVDs. It's that simple. Besides, even today, DVD and Blu-ray sell-thru and rentals still represented about 79% of the $3.9 billion that U.S. consumers spent on home entertainment in Q3, according to DEG, an industry group that tracks the video biz. Netflix and everyone else in the sub. streaming biz? 7%. The DVD will still be with us in 2020, and so also will be Netflix's DVD biz.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Can Netflix do anything constructively this year?

    No. Even a company with all the right business acumen (which Netflix seems to be sorely lacking) would struggle with this. How do you deal with a legacy platform that is dragging down margins and headed nowhere fast? You certainly can't spin it off into a separate business. They demonstrated that quite handily. And the growing ubiquity of RedBox makes this even tougher. One possible option? Buy RedBox.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Losses now, international dreams later...

    Netflix said it will take losses in early 2012 to expand in the U.K. and Ireland. Is that the right move?

    Posted by Lawrence Dignan

    Smart move

    You have two choices in the technology and media biz. You can grow or you can die. I don't see that Netflix has any choice but to try to grow internationally. Now, if the BBC would only finally let us folks on this side of the pond get iPlayer access I'd be a happy man. Hear me Beeb!?

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    In streaming? Yes. DVD, not so much

    Europeans have been building mobile infrastructure and bandwidth for far longer than we have in the US. They're far more capable of dealing cost-effectively with streaming than we are and their sales models for mobile devices forces far greater competition on plans. This is good news for streaming services. DVD by mail is low margin wherever you are. Netflix needs to tread carefully here...they probably won't.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Netflix has started to create its own content. Can that pay off?

    HBO-lite anyone?

    Posted by Lawrence Dignan

    I think that's what Netflix would like to be

    New movies that people want to see and great original content. Sure. Can they pull that off? Well, we'll see. House of Cards, starring Kevin Spacey, will prove if they can create as well as deliver content. In the long run, I think any content middleman needs to also be a content creator. Yes, it's expensive, but it's the one way you can stand out from the others. Just ask Showtime. They had to follow in HBO's footsteps or they'd be just another generic movie channel.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Creating content is too expensive

    Let me rephrase that...creating content that people want to watch is too expensive. Brutally so, in fact. Millions of people create junk for YouTube, but Game of Thrones doesn't come out of a small budget. You need great writers, great actors (even if they're unknown), great marketing (not necessarily traditional, but great nonetheless), and the right distribution channels. This is a losing game for Netflix and I predict that it will go by the wayside soon enough. At least, I hope for the sake of its stockholders that it does.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Just a reminder...

    You're paid by one of those strange media companies so let's hope Uncle Les isn't reading this. Only half kidding. How important are mobile devices to Netflix? And more specifically how important are data charges to Netflix's future?

    Posted by Lawrence Dignan

    Mobile Video Woes

    That's a darn good question. Right now, most people aren't watching video on their tablets and such. I think that will change though. Certainly both Netflix & B&N and Amazon all hope so. That said, data charges are going to hurt everyone in the mobile space, and, for that matter, in traditional Internet networking. The carriers and ISPs have grown ever more greedy in both cutting down our bandwidth and in charging us more for what we do get. This is going to be a real problem for anyone in any part of the Internet video business--including those of us who just watch 30 Rock on Netflix or what have you.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Vital

    Mobile devices are always with us. On the train, in our car, on a plane, in our bedroom, in our pockets. Phones and tablets are getting smarter and cheaper and increasingly able to interface in HD with our bigger screens as well. Oh yeah, if there's not a good mobile strategy, there's no strategy at all. Data charges will be a major pain point for everyone if some deals can't be struck between carriers and particular content providers. We all seem to keep paying for the data, though, don't we? Upping our allowances for increasingly rich mobile experiences on increasingly awesome devices that beg for something better than email and Twitter. This will be a pain point and risk, but ultimately, what are we going to do? Read ZDNet on our mobile device or watch a movie? Most likely both, regardless of cost. Data is quickly becoming an inelastic good.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Does Netflix have an economic moat around its business?

    In other words, does it have a defensible business model.

    Posted by Lawrence Dignan

    Nope.

    Netflix, like any of the video providers, yes, even Apple and Amazon, are dependent upon the kindness of strangers. Or, to be exact, some very strange media companies. If these companies decide, for example, that the only way you can get their content is on their own Internet "channels" everyone else is out of luck. I don't think they're going to do that. Hulu Plus could have been that, but as I said they don't seem to have a clue about what they want to do. But, we're in a place where any middleman content business model is in danger. And, that by the by, includes far older businesses like over-the-air TV stations.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    If it has a moat, the bridge is down

    No there are a lot of potential competitors. As I mentioned, studios will increasingly want to be selling their own content. Other upstarts will find ways to leverage cool tech to stream things better, faster, and cheaper, or to provide ad-supported cheaper content, or to provide indie contentyou get the idea. My money is on ad-supported content, partnerships with mobile providers, and the right content deals. What if your data usage was cut by 50% by Verizon if you were streaming from Amazon? Not saying it will happen, but if it did, talk about crushing Netflix. I can see Apple or Amazon brokering a deal like that. I can't see Netflix having the muscle left to do so.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Do you have a Netflix subscription? Why do you keep it?

    Sounds like both of you do. What would it take to dump Netflix?

    Posted by Lawrence Dignan

    What would it take?

    It would take a fixed price service with either, or better still both, more video selection and more up-to-date video. One of the big reasons I don't see me leaving Netflix behind anytime soon is no one else is offering either of those.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Just a wee bit more content elsewhere

    A growing number of the shows my family and I watch via Netflix are coming over to on-demand services, Amazon, and Apple. That's about all it would take. The on demand is free through my cable provider and with Redbox I can get any DVDs I want. Fill in with other providers that shoot stuff right to my tablet and I have all I need (and a whole lot more) at reasonable prices.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Putting money behind your opinions

    Two questions: First, would you buy Netflix shares here? Second, would you recommend a non-Netflix subscriber to become one right now? Support your answers

    Posted by Lawrence Dignan

    To buy or not to buy, that is the question.

    I don't buy any tech. stocks since I cover the industry, but if I did, I'd buy Netflix still. They've had their knocks. They should be coming back. As a video consumer, and Netflix subscriber, I still recommend Netflix. Don't forget that, unlike Amazon, with Netflix it's a one-price buffet. You can watch all you want on DVD or online for a single price and without ads. With the exception of Amazon Prime's limited selection, no other streaming service offers so much for so little.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Uhhh, no. And no again

    Competitive pressures are far too high from Amazon and Apple, to say nothing of disruptive startups, the studios, and indie content providers. Google will no doubt be moving into this soon enough (they're already making some progress on YouTube). No shares for me. Not if you paid me. I subscribe to Netflix and use it frequently. But I also use Amazon and iTunes frequently. As they scale up their available content (happening very fast), I'll gladly dump Netflix. And I certainly wouldn't recommend that friends jump onto a bandwagon with broken wheels.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Amazon vs. Netflix

    What kind of competition will Amazon provide to Netflix going forward?

    Posted by Lawrence Dignan

    It's war!

    While Netflix has lots of things to worry about, Amazon is a real concern. There's a darn good reason why Netflix just partnered with Barnes & Noble on the new Nook tablet. They want to be able to deliver content on an inexpensive tablet that's not under Amazon's control and is likely to be quite popular.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Amazon will crush Netflix

    Apple is in the ring, too, but the Kindle Fire, a device that is not only commodity-cheap, but optimized for Amazon digital content, is the ultimate gauntlet. It gets thrown down next week. Amazon demonstrates over and over again that it can scale sales and distribution models like no one else. Netflix can create Qwikster. Who's going to win that fight?

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Release windows

    Do you expect content companies to provide Netflix better release windows for movies? It's hard to get anything current on the streaming service. Will that change for Netflix and/or Amazon?

    Posted by Lawrence Dignan

    Alas, no current content for us

    The studios want to milk content for every dime they can. At this time, they're still not sure what to make of streaming. So, it will still be movie theaters/live prime-time TV; DVDs/on-demand video, and finally Netflix, Amazon, et. al.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Not anytime soon

    SJVN said it already - studios are reluctant to embrace new models. They're going to hang on to their DVD distribution models with death grips until consumers utterly rebel or new business models emerge to get them better royalties and more protection for digital content.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    About those studio risks...

    Do you think studios will play ball with Netflix or aim to keep it in check? Studios are dealing with Amazon, but may aim to drive costs up for Netflix. Thoughts?

    Posted by Lawrence Dignan

    The Studios are the real problem

    The simple truth is that the MPAA and buddies don't know what to do with streaming video. Like the RIAA before it they're reluctant to embrace this new channel for their product. Just look at the mess NBC and Disney have made of Hulu Plus! In the end, the studios will determine who wins and who loses, but they still don't have a real plan so it's hard to predict if the winner will be independent video providers--Netflix, Crackle; studio-associated Internet streaming companies--Hulu; or an existing content vendor--Amazon, Apple.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Amazon has scale...Netflix has lost out

    One of the most damaging things about Netflix' recent problems is its loss of credibility and clout with studios. Amazon has such massive scale and proven distribution capabilities (in literally anything they try to sell) that they will have a clear advantage with studios long term. They will be able to compete on price in ways that Netflix simply won't. Amazon also already sells other digital content (a lot of it), making it a better ecosystem with which studios will want to partner. The timing of the Kindle Fire couldn't be better.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Is its bet on streaming media correct? And what are the risks?

    Dawson mentioned that the DVD debacle hurt the brand. Is the long term bet solid?

    Posted by Lawrence Dignan

    Yes, we're heading for a streaming future

    and Netflix is still the biggest player in both the older DVD-by-mail market and in streaming. No one else is even close. In the long run, Netflix should win out. IF they don't make any more blunders. IF the content providers don't try to cut off streaming. And, IF Apple or Google don't make a successful play in streaming video. That's a lot of IFs, but I think they'll still make it. That said, I'd be looking for a new CEO if he makes one more blunder.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Streaming is the right bet, but the road isn't clear

    Yes absolutely. There are devices aplenty with many more to come, especially with the growing number of superphones available and tablet prices dropping like rocks, not to mention emerging set-top boxes, connected TVs, connected cars, connected refrigerators (seriously)There are more than enough devices to support streaming everywhere, all the time. Notice that your average connected fridge doesnt have a BluRay player. The risks? Bandwidth, baby. There are more devices and more content and more demand than inexpensive bandwidth. See how fast you hit your data caps or pricing tiers on a 4G connection watching the entire first season of The Walking Dead in HD. Unless Google works some fiber miracle outside Kansas City, were in for more pain here. How much bandwidth can you afford? And can you justify it for entertainment? Studios also represent a major risk they havent exactly caught up on this business model and represent a constant threat to anyone reselling content. Can you say digital rights?

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Rate Netflix's last five months

    Netflix has obviously struggled with the Innovator's Dilemma. Rate its handling of the pricing, DVD-by-mail and earnings debacles. I admire the trying to stay ahead of the curve thing but...

    Posted by Lawrence Dignan

    Netflix's management has been idiots

    I mean come on? Big pricing increases without explanation--and believe me they had reason to up their rates since the content providers were demanding 10x more than Netflix had first paid them--splitting the service into two? Trying in effect to kill off DVDs this early in the game? Dumb. Just Dumb. But, at least they realized they were dumb and they're trying to make things better.

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Do you still watch DVD?

    DVD by mail was a great model when people watched DVDs. Kind of like TV advertising was a great model when people watched live TV. There are still DVD watchers, actually (plenty of them), but screwing with pricing on a faltering market doesn???t make a lot of sense. This is also, in case nobody noticed, a pretty pathetic financial period. It needs to be all about value and that value prop has eroded quickly for Netflix. Bottom line: They're handling of pricing and managing DVD by mail (originally their core biz) has been poor of late.

    Christopher Dawson

    I am for No: More pain

  • Great Debate Moderator

    Testing 1, 2, 3

    Just conducting a mike check. Dawson, SJVN come in.

    Posted by Lawrence Dignan

    Ping!

    Ping!

    Steven J. Vaughan-Nichols

    I am for Yes: Big gain

    Read you loud and clear

    Ping

    Christopher Dawson

    I am for No: More pain

Closing Statements

Why Netflix can still win

Steven J. Vaughan-Nichols

So, with management missteps, grumpy content providers, disillusioned customers and potential competition from Amazon, Apple, and Google why do I think that Netflix can still win? It's simple: They still have no real competition.

Netflix is still the largest one price for all you can watch DVD and streaming video company out there. Its non-video rivals may be bigger, but their video-on-demand services still use a pay to watch a single model. Netflix's video rivals, such as Redbox and Blockbuster, have little streaming presence and they've also raised their rates in the last few weeks.

It's not easy to set up a big-time video streaming company. You've got semi-hostile media companies; you have to partner up with content delivery networks (CDN)s; you've got to get your player software in DVD players, media-extenders, etc.; you must set up serious video server data farms. It's a big job. Netflix already has all the parts and its one price business model. No one else does.

Netflix - It's terminal

Christopher Dawson

My colleague, Steven J. Vaughan-Nichols, outlined some very reasonable arguments explaining why Netflix will thrive in the future. Most importantly, he cited their subscription model, noting that "no other streaming service offers so much for so little." He’s right, of course, but this is hardly a defensible market position.

Perhaps the clearest reason that the company's unfortunate fate is already sealed, though, is the changing hardware, software, and content landscape. Ubiquitous streaming HD content on mobile and other connected devices is just around the corner. With Apple retaining dominance in the tablet space and Amazon dumping their Kindle into the market, the concept of ecosystem has never been more critical.
 
Too many strong competitors, too many PR gaffes, and too clueless a leadership team mean that Netflix was in the right place at the right time 10 years ago, but missed the boat for 2012.

Netflix will survive, thrive

Lawrence Dignan

This debate was a bit strange because the two parties often agreed. Dawson argued that Netflix has more pain ahead---and could be right. Vaughn-Nichols agreed that Netflix may still take its lumps, but will recover in the long run. In the end, the winner comes down to time frame. I'll side with Vaughan-Nichols on this one: Netflix's mistakes were messy, but not fatal. Netflix has its issues, but the business has scale and can be defended against rivals.

Doc's final thoughtsIN PARTNERSHIP WITH Ricoh

Doc

Doc has to agree with Christopher on this one. Only the death of Netflix may not be long and painful, it could be short and painful. As Christopher points out, this is a public company and subject to the whims of the market along with the whims of customers. The company’s stock has already dropped from a high of near $300 to $90 per share – that’s a stunning loss of corporate value.

You only have to look at the fate of video-rental mega-chain Blockbuster to see this movie play out. At its peak, Blockbuster had over 43 million members in the United States, over 6,500 stores worldwide, 60,000 employees and $4 billion a year in revenue. But then technology changed, the market was not kind, and in April Blockbuster was purchased out of bankruptcy by Dish Networks for $320 million. Yes, it’s still around, but is a shadow of its former self and clearly no longer the leader in video rental, streaming or anything else (despite trying very hard to make the appropriate transitions).

Netflix worked because it was the right service at the right time. There is no guarantee that the new streaming model for Netflix will be successful, despite the company’s 28 million subscribers. People dropped their loyalty to Blockbuster pretty quickly when something better came along so Netflix needs to be careful. It’s a fast moving world and customers will go where there is convenience, good pricing, and the right technology. Today’s Netflix could easily be tomorrow’s Blockbuster. Brand loyalty isn’t what is use to be.

Topics: Great Debate

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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