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Technological Shifts
A lot of really interesting competitive opportunities are opened up when someone sees a change in the environment and moves to capitalize on it as an opportunity. And you know, a great one that is by now pretty well known, but I think still illustrates the point nicely is the transition from movies that were sold on cassette tapes to movies that were able to be sold on DVDs. And if you think about it, a cassette tape note, you’re going to have to go back in history, but a cassette tape movie could cost $50 or $60. Like we’ve forgotten that by now. You know, we’re so used to very inexpensive digital offerings. We fail to remember that at the time that Blockbuster, for example, got going, their selling point was that for much less than that, you could rent the movie for a night or two and enjoy watching it and then return it.
And then they would re-rent it to other people. And the catchphrase at the time was “Be kind, rewind,” you know, rewinding these cassette tapes. So this the beginning of the inflection point that eventually gave rise to Netflix was two things. The first was a technological shift, which allowed an entire movie to be published on a DVD. And a DVD was a completely different form factor. It was light. It could fit in an envelope. And even though it was still pretty expensive, the costs were already starting to come down relative to what it took to create a product. The second thing that led to Netflix being an inflection point, is actually a evolution of digital business models. So the content creation people always had a very rigid system for say, movies, where the movie was first shown in theaters, where people had the highest willingness to pay. Then it kind of went the rental route.
Then it kind of went, you know, into the, into the movies. You could have your own. Then it was residuals. And in the early stages, production companies really didn’t have a lot of ways of making money off residuals. Netflix said, “Hey, you could sell us the rights to your residuals. We will pay you.” And it became an addictive, additional revenue stream for a lot of the content producers. So that gave Netflix the ability to have all this content. Some of which was pretty popular, some of which was pretty niche oriented, uh, to really fuel the beginning of their subscription model. Now, as we have seen plenty of people now observing, the production companies have regretted that for a long time. And what they’re now doing is they’re going into competition with Netflix developing their own streaming services. So I think we’re yet again, seeing this inflection point kind of coming around to possibly undermine Netflix’s model, where Netflix is now in the business of having to create hugely expensive content in order to keep people on their service, to keep people subscribing.