Netflix used to have a charmed life.
This year, however, poorly thought out strategy and lurching decisions are stripping away many of its advantages and making it vulnerable to competitors.
Established in 1997, its founders saw opportunities in creating an Internet-based DVD-by-mail distribution system. It was designed to be a competitor to physical video stores, making it more attractive by offering a larger selection and using a unique IT driven distribution system that combined distribution centers across the country to serve customers within 24 hours at highly attractive prices.
The DVD-by-mail service became a hit, ultimately devastating the market of physical stores such as Blockbuster. By 2007 it had delivered more than 1 billion DVDs to customers. That same year it launched on-demand video streaming service so customers could also select a video and stream it to a PC (and later other platforms) for immediate viewing. The company allowed viewers a highly popular choice of physical DVDs or streamed video for the same price.
Effective marketing and the enviable distribution system led the company to became the largest video subscription service in the U.S., with 24 million customers
Despite--and because of the investments required for--its growth, the company was losing money on its $10 per month price for the joint service, so it suddenly increased it price to $16 dollars (a 60% increase) in July. That significant price change and the poor way it was introduced to customers—especially in the midst of poor economic times, angered customers and created price resistance that led a least a half million to drop the service.
Then, in September, the firm announced it would spin off its DVD-by-mail service and rebrand it Qwickster, leaving Netflix with the digital streaming business. Customers were furious to learn they would now have to pay separately for both services. By downplaying its DVD-by-mail business, the company hopes to reduce distirbution costs and its costs for content by moving content from a per rental basis to per subscriber basis that is more beneficial for the firm.
Netflix's decisions were not made with a customer focus, but a focus on stemming losses that worried some investors. That strategy is dubious, however, and share prices have fallen from nearly $300 per share in mid-summer to $140 per share.
The lurching changes have also made the company’s position seem vulnerable, leading to new competitors to enter the market. Dish Network, which bought Blockbuster out of bankruptcy, is now using it to introduce a competing DVD-by-mail and digital delivery services at competitive prices and Hula and Amazon are reportedly looking a ways to exploit consumer dissatisfaction.
The entire episode is a classic example of why companies should never take customers for granted and why company decisions need to be driven by creating--rather than subtracting--value for consumers.
Showing posts with label Amazon. Show all posts
Showing posts with label Amazon. Show all posts
Saturday, September 24, 2011
Sunday, May 29, 2011
Google, Newspaper Archives, and the Business of Cultural Heritage
Google announced this month that it is ending its ambitious project to digitally archive newspapers. The project to scan the archives of the nation’s newspapers and make them available online as a searchable historical record was announced in 2008 with the level of hubris only found in online enterprises.
"Our objective is to bring all the world's historical newspaper information online,” said Adam Smith, director of product management at Google, announcing the project. Those lofty aims were echoed by Punit Soni, manager of the newspaper initiative: “As we work with more and more publishers, we'll move closer towards our goal of making those billions of pages of newsprint from around the world searchable, discoverable, and accessible online…."Over time, as we scan more articles and our index grows, we'll also start blending these archives into our main search results so that when you search Google.com, you'll be searching the full text of these newspapers as well.”
After scanning about 60 million pages and beginning to make them available as full page shots--because costs of disaggregating and indexing were too high and copyright clearances were difficult to obtain for older material—the company announced that it will quit scanning pages, but continue offering the existing pages available on it Google News Archive site. It said it would not invest any new effort to improve indexing or add tools to better search and manage the archive.
The project may have been well-intentioned, but it was not well thought out. It was a free service designed to use the search traffic at the site to raise revenue through advertising Google would put on the site. The scale of the project was enormous and requiring finding, scanning, and indexing thousands of daily and weekly newspapers--many no longer in existence. It would require a long-term commitment of funds, personnel and server capacity to catalogue and scan the material and provide and maintain search functions. The project ultimately incorporated on a fraction of the papers it had hoped to scan, did so spottily in many cases, and its usability was poor because it never mastered the problems of handling so much content. Worse yet, it discovered that history was not a money making business.
The exit announcement is not a surprise and is another sign that players the virtual world are stopping deluding themselves that they are replacing the entire world and that the laws of economics and finance to not apply to them.
As laudable the preservation of newspaper archives might be, expecting it to be completed and maintained by a commercial firm defied sense and historical experience. For centuries, the most important historical records, books, art have been maintain in governmentally and charitably funded collections because commercial enterprises were either unwilling to bear the costs or to allow the large scale efforts required to preserve, catalogue, index, and make available cultural heritage materials distract them from their business activities.
Why would anyone expect Google to act otherwise?
As Google increasingly acts as a mature business it will increasingly shed activities that were launched as goodwill gestures because the costs of their operations reduces the company’s financial performance and will diminish the value of its stock compared to other tech firms. Over time it will be harder for the firm to maintain the stance that it is not self-interested and motivated only by the opportunities to improve the lives of the public by providing access to all the world’s information.
The tentacles of its operations that have reached out into to many fields will increasingly be pulled back if they do not yield financial results. And fears that Google will rule the world will diminish. Google, Microsoft, Amazon and other big players of the digital world all have limits, just as did the handful of firms that once controlled steel, oil, and shipping through cartels. At some point even mammoth, wealthy companies do not have the resources and capabilities to keep expanding endlessly and their performance declines, leading shareholders to rein them in and competitors to find opportunities.
"Our objective is to bring all the world's historical newspaper information online,” said Adam Smith, director of product management at Google, announcing the project. Those lofty aims were echoed by Punit Soni, manager of the newspaper initiative: “As we work with more and more publishers, we'll move closer towards our goal of making those billions of pages of newsprint from around the world searchable, discoverable, and accessible online…."Over time, as we scan more articles and our index grows, we'll also start blending these archives into our main search results so that when you search Google.com, you'll be searching the full text of these newspapers as well.”
After scanning about 60 million pages and beginning to make them available as full page shots--because costs of disaggregating and indexing were too high and copyright clearances were difficult to obtain for older material—the company announced that it will quit scanning pages, but continue offering the existing pages available on it Google News Archive site. It said it would not invest any new effort to improve indexing or add tools to better search and manage the archive.
The project may have been well-intentioned, but it was not well thought out. It was a free service designed to use the search traffic at the site to raise revenue through advertising Google would put on the site. The scale of the project was enormous and requiring finding, scanning, and indexing thousands of daily and weekly newspapers--many no longer in existence. It would require a long-term commitment of funds, personnel and server capacity to catalogue and scan the material and provide and maintain search functions. The project ultimately incorporated on a fraction of the papers it had hoped to scan, did so spottily in many cases, and its usability was poor because it never mastered the problems of handling so much content. Worse yet, it discovered that history was not a money making business.
The exit announcement is not a surprise and is another sign that players the virtual world are stopping deluding themselves that they are replacing the entire world and that the laws of economics and finance to not apply to them.
As laudable the preservation of newspaper archives might be, expecting it to be completed and maintained by a commercial firm defied sense and historical experience. For centuries, the most important historical records, books, art have been maintain in governmentally and charitably funded collections because commercial enterprises were either unwilling to bear the costs or to allow the large scale efforts required to preserve, catalogue, index, and make available cultural heritage materials distract them from their business activities.
Why would anyone expect Google to act otherwise?
As Google increasingly acts as a mature business it will increasingly shed activities that were launched as goodwill gestures because the costs of their operations reduces the company’s financial performance and will diminish the value of its stock compared to other tech firms. Over time it will be harder for the firm to maintain the stance that it is not self-interested and motivated only by the opportunities to improve the lives of the public by providing access to all the world’s information.
The tentacles of its operations that have reached out into to many fields will increasingly be pulled back if they do not yield financial results. And fears that Google will rule the world will diminish. Google, Microsoft, Amazon and other big players of the digital world all have limits, just as did the handful of firms that once controlled steel, oil, and shipping through cartels. At some point even mammoth, wealthy companies do not have the resources and capabilities to keep expanding endlessly and their performance declines, leading shareholders to rein them in and competitors to find opportunities.
Tuesday, February 2, 2010
THE BATTLE TO CONTROL ONLINE PRICES
The struggle to control prices of digital content sold online continues, with producers and distributors battling over prices for downloads of books and music.
In the latest skirmish, Amazon removed Macmillan books from its website after the company protested that online retail was using monopoly power to force publishers to accept prices no higher than $9.99. Macmillan and other publishers have now signed distribution deals with Apple that allows them to price downloads at $12.99 and $14.99.
Producers, of course, want higher prices because they produce higher revenue and better profits.
The struggle to control prices is not unique to the online environment. In the offline world, producers of books, magazines, CDs, and DVDs have long struggled to gain limited shelf space because there is a large oversupply of products and retailers’ have selection preferences for popular, rapidly selling products.
Large national and retailers have also used their bargaining power to push wholesale and manufacturer suggested retail prices downwards. Wal-Mart, now the number one music retailer in the World, uses its purchasing and sales power to sell large quantities of music at the lowest price possible—the basic price/quantity model for all the products it carries.
What is new in the offline world is that the conflict does not merely involve struggles over the price and quantity strategies of retailers, but that the retailers are using the media content as a joint product with their proprietary digital hardware.
Amazon wants content prices low not merely to sell more books, but because it helps it sell Kindle, its e-book reader. To date, it has been able to do so because it was the leading seller of both products—something it learned from Apple’s strategy with i-Tunes and i-Pod.
Competition in distributing content, even just a little competition, helps shift some of the power away from the retailer and back to the producer. Apple was forced to back away from its enforced price of 89 cents for a download when recording companies made deals with other download providers and threatened to end the rights for Apple to see their popular music. Apple is now playing spoiler to Amazon in the book downloads and Amazon has agreed to carry Macmillan books again.
Newspaper publishers are now seriously testing and considering a variety of e-readers as ways to reduce production and distribution costs. As part of their strategies, however, they would do well to learn from the experience of the music and book business. They need to remember that a basic rule of business is that if you don’t control price, you don’t control your business.
In the latest skirmish, Amazon removed Macmillan books from its website after the company protested that online retail was using monopoly power to force publishers to accept prices no higher than $9.99. Macmillan and other publishers have now signed distribution deals with Apple that allows them to price downloads at $12.99 and $14.99.
Producers, of course, want higher prices because they produce higher revenue and better profits.
The struggle to control prices is not unique to the online environment. In the offline world, producers of books, magazines, CDs, and DVDs have long struggled to gain limited shelf space because there is a large oversupply of products and retailers’ have selection preferences for popular, rapidly selling products.
Large national and retailers have also used their bargaining power to push wholesale and manufacturer suggested retail prices downwards. Wal-Mart, now the number one music retailer in the World, uses its purchasing and sales power to sell large quantities of music at the lowest price possible—the basic price/quantity model for all the products it carries.
What is new in the offline world is that the conflict does not merely involve struggles over the price and quantity strategies of retailers, but that the retailers are using the media content as a joint product with their proprietary digital hardware.
Amazon wants content prices low not merely to sell more books, but because it helps it sell Kindle, its e-book reader. To date, it has been able to do so because it was the leading seller of both products—something it learned from Apple’s strategy with i-Tunes and i-Pod.
Competition in distributing content, even just a little competition, helps shift some of the power away from the retailer and back to the producer. Apple was forced to back away from its enforced price of 89 cents for a download when recording companies made deals with other download providers and threatened to end the rights for Apple to see their popular music. Apple is now playing spoiler to Amazon in the book downloads and Amazon has agreed to carry Macmillan books again.
Newspaper publishers are now seriously testing and considering a variety of e-readers as ways to reduce production and distribution costs. As part of their strategies, however, they would do well to learn from the experience of the music and book business. They need to remember that a basic rule of business is that if you don’t control price, you don’t control your business.
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