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Executive Trends: 'Scarcity' vs. 'Multiplicity', that is the question

In his book “The Zero Marginal Cost Society”, Jeremy Rifkin elaborates on the idea that the Internet Of Things (IoT) and ‘The Collaborative Society’ (Wikipedia is the best example of this) will produce ‘the collapse of capitalism’, or something like that, by delivering products and services at prices close to zero.

(Private Advisor, April 2018) The Rifkin book leaves unanswered an array of questions; but, it is a reference to a concept we have explored at past Private Advisor reports since Silicon Valley emerged as a competitor to Hollywood in content production or distribution, through Google, YouTube and more recently Tweeter, Facebook and Linkedin, among other social networks. In this sense, Netflix should be considered as part of the Silicon Valley party, since it is offering content at a price much lower than regular cable TV and has already reached 125 million subscribers worldwide, a clear “multiplicity” achievement.

Let’s return to the contrast between both approaches: the “scarcity” strategy tries to extract as much money as possible from each consumer level (according to its purchasing power or anxiety) and has been applied by Hollywood and its allies --the other linear pay television major content providers, the cable operators and the DTH services-- during decades: their “food chain” starts with a movie shown at a theatre to people paying so much for each ticket, goes to Pay Per View, then to premium cable channels, followed by basic cable channels, ending at broadcast television. The former DVD stage was inserted between Pay per View and premium cable, but streaming --a typical Silicon Valley product-- has been interfering with this. Blockbuster has been one of the victims of this confrontation.

The Silicon Valley “multiplicity” sequence goes the other way around: it seeks a price which a huge amount of viewers (125 million worldwide in the Netflix case) will be willing to pay. It does not care about the fact that part of these 125 million would accept paying, say, $25 instead of $12 for a monthly subscription. It believes that $12 x 125M will result in higher income than, say, $25 x ?M, where ?M should be more than roughly 62.5M to make ends meet.

Can Tinseltown apply this procedure? According to the Technological Generations Theory (based on the disruption produced by consumers changing the device applied to consumption), hardly. Its corporate culture does not allow it to this think this way. The Hulu case is a clear example. Disney, a company well positioned in dealing with final customers through its theme park experience, will have to overcome this legacy roadblock if it is to establish a massive direct-to-customer streaming relationship. Of course, there are attempts: what we know as “live prepackaged streaming” or “Linear OTT” are examples with roots to be found in the “A la Carte” cable programming strategy, which met stern opposition from the industry during decades. SlingTV and several others appeal to a customer (the “cord-cutter”) that’s rebelling against having to pay for 150 channels while watching 6 to 13 of them, or a newcomer (“cord-never”) that refuses to accept such situation.

Cable operators face another disadvantage: cable penetration has been ahead of Internet penetration during many years, but now the percentage of households and individuals connected to the Web is growing at a higher rate. So, a new market has been developing in the recent past: those interested in watching premium channels --say, HBO, Showtime, Starz, Fox Premium and others-- without having to pay for a basic package in order to be able to access them. Eventually, Internet access will reach millions of households not wired to cable or downloading satellite signals: this may require, in the future, a strategy closer to “multiplicity” than to “scarcity”. This is a problem for the studios mindset.

Then, you have piracy: price is an important issue when you are dealing with people who have the chance to access illegal retransmissions of your coveted programming. While there are types of content (such as sports) that will always require protection, as a whole the issue appears to be an incentive to move from “scarcity” to “multiplicity” and balance the difference in income with advertising, sponsored content and other paid alternatives that are shocking the Madison Avenue veterans and disrupting the major worldwide agencies. As seen at the recent antipiracy conferences held in Latin America, direct individual action (other than just hijacking the offenders) is hurting but still not fending-off the delinquents.

Industry forecasts reaching 2022 predict that the linear television industry will retain its subscriber volume. But, its ARPU (Average Revenue Per Unit) will decrease through the migration of part of its current customers to lower-rate packages through “linear OTT” a.k.a “live streaming”. Concerning Netflix, Private Advisor analysis points out that its top problem is not competition from Hollywood (unless somebody from there comes up with a “multiplicity” business model) but the high cost it’s paying for original product and the resulting debt it is carrying. There are also some disturbing news about the volume of business brought by its original content (other than publicity and word-of-mouth): according to Nielsen, about 80% of Netflix watching goes to its licensed content; at a NATPE session organized in cooperation with Prensario, Telemundo International exec Marcos Santana asserted that ‘70% of the content watched on digital has been originally produced for linear television’.

This happens in a context where Netflix must constantly keep growing to maintain its shareholders at ease. So far, the telcos do not appear to be a competition to fear, and Amazon’s report about having reached 100 million Prime customers is not necessarily a menace to Netflix, since Jeff Bezos has a different business model in mind. To him, original content is a tool, not a goal to achieve. Of course, in the meantime it applies its deep pockets to increase just a bit more the content production cost, resulting in more pressure on Netflix’s balance sheet.

 

For more on this issue, see The Technological Generations Theory

 

See others Executive Trends analisys:
Executive Trends: On disruption and more (March 2018)
Executive Trends: Content as Commodity (February 2018)
Executive Trends: Competing with Netflix (January 2018)
Executive Trends: A Brave New World (December 2017)
Executive Trends: The wild world of co-production (November 2017)
Executive Trends: Is Big Data Overrated? (October 2017)
Executive Trends: From content packaging to original production (September 2017)
Executive Trends: The Mother of all Battles (August 2017)
Executive Trends: Power Game makes U-Turn (July 2017)
Executive Trends: Digital Content, Piracy and Credit Cards (June 2017)
Executive Trends: The other crisis (May 2017)
Executive Trends: Reinvention needed (April 2017)


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