Why Netflix works

By Pascal-Emmanuel Gobry on August 29th, 2013

Netflix is a great business. All that Netflix needs to stay sustainable is to have around 30 million subscribers paying it $8/month for its service. And all it needs for that is a combination of lots of “long tail” content and a few hit, exclusive, “must-have” shows.

The long tail content is easy to get, since Hollywood studios are happy to keep making money from old shows (it’s pure profit for them). That leaves Netflix plenty of money to fund original programming, which it has done. Netflix is building the HBO of this decade, and doing pretty well at it.

All of this will remain true whatever happens to television. This is the cleverness of the Netflix business model: whatever happens to Apple or Google’s pie-in-the-sky plans to reinvent TV, Netflix’s fundamental value proposition will remain the same, and as long as it delivers on it it will have a good business.

Which is why the claims that Netflix is reinventing TV that we’re hearing lately are a bit over-blown. What’s so clever about Netflix is precisely that it’s one of the few video endeavours that’s not premised on a reinvention of TV in order for it to work.

And that’s good, because the reinvention of TV won’t happen for a while.

Here is the big dream of internet types who want to reinvent TV. They realise that a TV is a screen. And any good screen ought to be hooked up to a computer, which ought to be hooked up to the internet.

This would mean that your TV could show you web TV or regular TV, all on demand, all through the same channel. No need to fiddle with clunky cable boxes, no need to buy a bundle of channels: just watch whatever you want to watch, whenever you want it.

Silicon Valley denizens have been trying to make this happen ever since the internet was the internet – and even, in fact, before that. Few people remember this, but before Netscape’s IPO, the Next Big Thing in the Valley was interactive TV. The Valley knew people would be networked and shop and communicate, but thought it would happen through TVs, not computers.

Since then, start-ups from WebTV in the ‘90s to Boxee more recently, as well as Google with all its financial might and its behemoth asset YouTube, have tried to bring forth this reinvention of TV. So too Apple with its design genius. All have failed.

Why? Because, while seductive, the reinvention of television is a solution in search of a problem. For the vast majority of TV users, who don’t spend their lives thinking in terms of computer systems and networks, the TV experience is fine.

Nerds see a screen, and they think it would be better if it were a computer. But most people see computers as a lean-forward medium, that they have to interact with, while they see TV as a lean-back medium, where they can just sit and flip channels and watch.

The whole attraction of TV is that you can just put it on. The fact that you could turn it into an internet terminal misses the point.

Nerds see computers as easy to use, because they can understand them, and TVs as inelegant and clunky, but normal people see something of the reverse: they consider computers difficult to use, but TVs relatively easy.

The other reason why TV won’t be transformed tomorrow is the Catch-22 of content. In order to make an internet TV more appealing than a regular TV, you have to have, at the very least, all the same content that you can get from a regular TV.

And that content is controlled by networks and cable companies who would be disrupted by the reinvention of TV, and are very much not in favour of being disrupted. If internet TV had all the same content as regular TV, it would be great. But it does not.

I’m not saying it won’t happen: eventually, the internet really does eat everything. But I am saying that anyone who expects it to happen within the next few years is fooling themselves.

Before that happens, Netflix will make money. After it happens, Netflix will still make money.