How Porn can teach Netflix a Lesson on Innovation

From one of the funniest musicals I’ve watched:

https://www.youtube.com/watch?v=LTJvdGcb7Fs

The Hook

Like it or not, the porn industry as a whole has been innovating long before its counterparts in the entertainment business. (Source)

• Erotic novels helped the printing press get off its feet (terrible pun not intended)
• The VHS vs Betamax videotape format debate was determined by the adult film industry (the same with Blu-Ray vs HD DVD)
• Video stream functionality you see on YouTube existed on porn videos years earlier
• Online business models including affiliate marketing and subscription payments was pioneered by adult websites

So what’s the “next big thing” in porn you ask? Virtual reality.

We already have Facebook purchasing Oculus Rift and a host of other products being developed in market by big companies (e.g. Sony, Samsung and Google). VR is here to stay and this is where entertainment is heading, so companies might as well get ahead of the game whilst the technology is still in its infancy in term of the adoption lifecycle.

Furthermore, technology companies are now seeing the benefits of becoming vertically integrated (i.e. the combination in company of two or more stages of production normally operated by separate organisations):

• Apple: Hardware (Macbooks) –> Software (iTunes and iCloud)
• Microsoft:  Software (Windows / Office) –> Hardware (the Surface product range)
• Amazon: Platform (Website) –> Personal assistant hardware (Alexa)
• Snapchat: App (Snapchat) –> VR accessory (Snapchat Spectacles)
• Facebook: Social Media –> VR accessory  (Oculus Rift)

This is why Netflix should get into the Virtual Reality space with both content and hardware, as they can own more parts of the home entertainment experience and create an eco-system for themselves and in turn customers develop a greater dependency on the company.

The Line

Assets

Netflix has a few assets going for them in leading the Virtual Reality content charge:

• Data coming out of their ears, in particular – Viewing habits / Search data of users on the content they’re interested in
• Technology infrastructure in terms of servers and bandwidth to serve the content
• Existing users (100 million subscribers) to test the new offering on
• Expertise:
  • Software engineers to help with scale and scope
  • Experience of creating content from all the Netflix original that have been to market already
• Brand recognition and PR – allow for positive association and brand awareness of the company:
  • Handling of the controversy surrounding Kevin Spacey
  • Netflix button on remote controls provides an example of how deep it’s reached into home entertainment
    

Boundaries

Privacy

Monetizing the data to be sold to 3rd parties is frowned upon. Especially in a world where consumers are become more conscious of consent and privacy on data generated from view habits

Partnerships / Licensing agreement

Ensuring that licensing partners are compensated with a fair value exchange between partners to ensure there is enough content available for customer to continue paying the subscription. There is a threat the Disney, for example, will not renew their licencing in favour of creating their own streaming service.

Going into hardware (self-imposed)

The success of Netflix has been the quality of content and I see a self-imposed boundary based on path dependence where past success doesn’t necessary equate to future success.

Types of content (self-imposed)

As a side note, currently Netflix doesn’t have porn in their catalogue but there are films and tv shows close to it. After doing a bit of digging, I can see there is a legal angle that can be taken. But it looks like it plays second fiddle to the brand image and having the company be ‘family friendly’. However I can see multiple ways of creating a subsidiary like “Netflix – Adult” or something that can cater for another market.

Narrative

I can see two narrative’s at play here.

Innovator, not afraid to take risks

Netflix’s original business model was quite similar to Blockbuster’s rental revenue stream (and we know how well that turned out for them). However Netflix was able to see themselves more than just a rental company and more a portal to entertainment, which allowed it to pivot to a video streaming platform providing home entertainment. Which bring me to my next narrative.

Entertainment vs Experiential

Currently Netflix sees itself as a home entertainment company, an alternative to holidays and ‘going out’. However Virtual Reality is more experiential and immersive, and therefore for Netflix to occupy the space it may to redefine its value proposition so that the hardware component ‘makes sense’ to the customer with existing patterns and frames of reference.

The Sinker

Further questions that may be need to be investigated to make this decision are:

• What’s the cause of the churn for customers?
• Realistically what percentage of the subscribers are willing to purchase a VR headset from Netflix?
• How can you tell the story to customers in believe the Netflix hardware is better than the existing one’s in market?
• What features would customers be looking for?
• What do customers want out of VR that is different from regular TV shows?
• Which OEMs can Netflix partner with to create the headsets (like Google’s partnership with OEMs in producing the Pixel phones)
• What else can the Netflix ‘ecosystem’ be built around?

The opportunity is there, especially because the ‘utility’ or usefulness of VR headsets are dictated by the amount of content that is available to consume. Without content VR headsets are just a gimmick, therefore leveraging the experience in content creation puts Netflix in a great position to be the market leader in VR for the mass market using their existing subscriber base as their brand advocates.