The Netflix Business Model: Why It Means Extinction for All Others

Once upon a time there were giant brick and mortar buildings that housed thousands of copies of movies on cassette tape and DVD. If you didn't want to spend the money to buy your very own copy of a film, you'd go over to these stores, sign up for a membership and rent the titles you wanted for anywhere from one to six days. If you didn't return your title on time you were charged late fees at a daily rate.

Then in 1999 a company in California decided to take advantage of the Internet and mail-system delivery of movies without late charges. The world as we know it was forever changed, if slowly at first. Netflix may not have been an overnight success, but in 12 years it has managed to revolutionize not just how we get our movies at home, but its business model has started to push digital distributors of other content like music to rethink their way of doing business.

This new business paradigm will ultimately bring the entertainment industry to its knees, forcing everyone involved to adopt a business model that allows users access to gigantic libraries of artistic content for a reasonable price, and that doesn't force consumers to purchase media, but rather allows them to "rent" the content they want for however long they want it.

Fast, Instaneous, and Unlimited-The Netflix Model

When it first started Netflix was strictly delivering DVDs to their customers homes via the US Mail system. Their biggest sales point was that you could keep the DVDs they sent you for as long as you wanted without worry of late fees. Since you were paying a monthly fee, they had no problem with you holding onto the same movie for six months if you really wanted to.

This in and of itself was game changing. No longer did you have a ticking clock in the back of your mind when you saw your rented titles on the mantle. You could wait until the weekend to watch your movies if you wanted to. However, the innovation that really pushed Netflix into total dominance was the advent of streaming content. In 2010 "Netflix Instant" debuted, giving access to thousands of titles to customers with compatible video game consoles, computers or Blu Ray players.

Suddenly a physical disc wasn't needed at all. It was possible to watch hours and hours of content using just a broadband Internet connection. Netflix Instant also does not place any caps on how many titles a user can stream. When they started offering a streaming-only tier of service for less than $10 a month an almost unlimited world of movies and TV shows made itself available to consumers everywhere.

Leveraging the power of broadband Internet connections in more and more homes, it is now possible for Netflix to deliver High Definition quality video and sound into homes for a very low monthly fee. Customers can even watch content on their smart-phones or tablets while on vacation or on business trips. What Netflix has become is a subscriber-based mobile content library capable of content delivery from anywhere on the planet.

The Movie Theater "Experience"

Box office ticket prices have risen steadily since the mid 1970s. Regardless of the economic state of the country, it has become increasingly price-prohibitive to take a family of four to a night at the movies for less than $100. Theaters are forced to charge so much for tickets because they have to pay a lot of money to the studios and distribution companies in order to get the rights to exhibit their films.

Once you get past the box office, you are assaulted with the concession stand. Movie goers for decades now have complained about the prices that are charged at movie theaters for candy, popcorn and soft drinks. Theater owners are again pigeonholed into charging such high rates for their wares because of how very little they get from the ticket sales. In most cases it's less than 10% that they get to keep. Then once inside the theater you battle chatty move goers, texting on phones and any number of impolite behaviors that all but ruin the experience of watching the latest blockbuster in a big auditorium.

Netflix offers HD quality movies in their streaming service that starts at a paltry eight dollars a month. For what a family of four spends on one night at the big multiplex they can get over an entire year's worth of movies and TV shows from Netflix. With the prices in large screen, HD televisions dropping, and with the addition of 7.1 Surround Sound systems coming down in price as well, the average consumer will be able to replicate all the good aspects of watching a movie at a theater right in their own home, without any of the downsides.

How long will it be until movie theaters are relegated to the same category that live theater productions are in now?

Cloud Storage Services - Not quite getting it right

On the face of it, a cloud storage service such as Amazon Cloud or Apple's much anticipated cloud service seem to be the next logical step from the Netflix business model. However, one key difference is that both services are design to sell more product. In this case, the product is MP3 versions of songs. Both Amazon and Apply will charge you for the privilege of storing all your licensed content on their servers as well.

Netflix doesn't force their consumers to purchase the movies to TV shows they watch. Instead, it serves as an enormous on-line public library. Your membership to Netflix is your library card and as long as you pay your monthly fees, you can check out as much content as you want. This is the fundamental flaw in the cloud business model.

No matter how they are marketed to consumers, cloud storage services are nothing more than massive off site flash drives for your own content. Pandora, on the other hand, has done it right. The on-line leader in streaming music content has essentially taken Netflix's business model and even improved on it.

Pandora: Thinking outside the box

The proof of the Netflix business model's innovation and near guarantee of success is in Pandora. The on-line leader in streaming music content has managed to carve out its place on the Web simply by allowing users to create an account and listen to the music they want. In a way, offering both a premium and free version of their service has managed to tweak the Netflix Model and improve on it.

Pandora is the musical equivalent of Netflix on nearly every level. It's readily available on numerous devices, using a broadband Internet connection. It does not force consumers to purchase the content they want, and offers virtually zero restrictions on how much content their members stream.

The Death Rattle

If more multimedia companies such as record labels and movie studios don't adopt a model that at least closely approximates the Netflix model, they will be as extinct as telegraph stations before long. The Internet was a bell that once rung has shook many commercial endeavors to the core. Consumers now want to maximize their options for as little money as possible.

Paying $20 for a CD with two songs you like, or spending $100 on a night at the local multiplex will become more and more appealing as more and more people sign up for Netflix or Pandora. The tides of change are sweeping in, and the companies that are able to embrace the change and assimilate it as much as possible still have a chance to survive. Those that don't, those that take the historically traveled road of fighting change against all odds will fall by the wayside, no matter how prominent they once were.

Behind us all is a generation that knows nothing except the Internet and the Netflix Model. Everything that was done before will seem arcane and therefore unwanted. Once a product or service is unwanted, it will die on the vine. The only question is which companies can hitch up new sails to change direction, and which will sink to the bottom of the ocean floor.