Wednesday, July 13, 2011

Netflix's Recent Pricing Change

I believe Netflix's recent decision to change their pricing structure is actually a move that promotes the streaming feature as a top-tier element in their catalog of products they offer to consumers. Initially, streaming was simply a perk you got if you subscribed to your one disc at a time offering. I am sure this was integral to helping spur customer adoption of the service. Equally beneficial was their AOL like partnership drive to embed a Netflix player in every conceivable consumer electronic device possible - Computers, iPhones, iPads, connected TVs, DVD/Blu Ray players, Wii, PS3, XBox, etc.

Once they had a number of people using the product, they started to hear requests from people who are ONLY interested in the streaming product (I'm one of them). Those customers wanted a cheaper option where they didn't have to pay for the option of getting a disc in the mail. Netflix, being the customer-focused company they are, listened to their customers and made one available. And it was cheaper (by a buck) because Netflix no longer had to send out DVDs.

The big question is WHY are they doing this? Is it because they have to or because they want to? Personally, I think it is because they want to and their ultimate goal is to kill off the desire to get physical DVDs in the mail. Not because they're losing money - but because the margins on streaming only are so much better - like thirty-three times better. Netflix was launched in 1997 and has been profitable since 2003.

Let's follow the money.

After doing a little research back in 2010, it cost Netflix $0.015 per gigabyte to stream a movie. Assuming a typical movie is about 1.8 GB in size, this works out to a cost of about 2.7 cents. Netflix had negotiated a special deal with the United States Postal Service which allowed them to use their specially designed mailers and qualify for the standard 1 ounce postage rate - $0.44 per mailing. So the cost associated with distributing a physical movie to a customer is $0.88.

Netflix ships discs Monday through Friday. This works out to an average of 21 2/3 shipping days per month (52 weeks * 5 days / 12 months). Shipping a disc to you and then back is going to take 2 days. If you assume Netflix sends the next disc in your queue to you on the same day they receive a disc from you, you will only get 7 DVDs per month. If they ship it to you the next day, then you're down to 5 DVDs a month.

For a given month, if a single disc subscriber watches the movie the day/night they get the disc and return it the next day, Netflix will pay $6.16 in postage to deliver (and receive back) 7 DVDs. $4.40 in postage at the 5 DVDs a month rate. Contrast that to 13.5 cents for streaming five movies or 18.9 cents for seven movies. Streaming looks better from a cost perspective, eh? Consider the fact that streaming has absolutely none of the other costs associated with physical DVDs - the mailers, warehousing, receiving and sending out DVDs.

At the end of the day, I think Netflix ultimately wants all of their customers to switch to streaming consumption and one of the best ways to do that is to make it the cheapest option. If you want streaming AND physical DVD distribution, then it is going to cost you twice as much. Some will pony up the extra dough. Many, I predict, will pick one option or the other. I bet streaming will win because theoretically, you can get a lot more value for your money because you don't have to wait for the physical discs.

It is funny to listen to the posturing from Hollywood and industry pundits at how they allude to the possibility that Netflix will lose access to the content it currently serves. According to NPD's VideoWatch Digital tracking service, in January and Feburary of this year 61% of the movies that were downloaded or streamed from Netflix. The next closest competitor was Comcast at 8% followed by a three-way tie for third at 4% between Apple, DirectTV and Time Warner Cable. When the contracts between content providers and Netflix come up for renewal, I would be willing to bet the content providers are going to get some more money for their wares. However, there is no way they'll pull their content because digital distribution is the future and Netflix is the 800lb Gorilla. Does anyone seriously think the content providers will get a better deal from Amazon or Apple? NBC Universal was unhappy with the deal they were getting with iTunes distribution and they pulled their content. Their digital sales flatlined and guess what you can buy/rent now on iTunes? I am an outsider, but in that little scuffle I'd say NBC Universal came back with their tail between their legs - making some money is better than making no money.

Netflix provides a great service to their customers. They offer DVD and HD quality streaming. They realize the DVD is "dead". Blu-Ray still has a little life in it, but let's revisit that after the iTunes juggernaught starts offering 1080p content this fall.

For the above numbers, have a look at the following articles:

"Netflix too big to fail?" entry on the I, Cringely blog

"GameFly to USPS: higher postange than Netflix costs us $730k per month" - ARS Technica

Netflix Fee Calculator

Sunday, June 12, 2011

Apple's "Mac App Store" versus Amazon's "Mac Software Downloads" Store

In my opinion, one of the reasons why Apple has been so successful in selling product is because user experience is paramount. There is a relentless focus on ensuring that software is designed to be as easy to use and intuitive as is possible. They always think about what is easiest for customers rather than what is easiest for them. Ultimately, they want it to be a conscious decision for customers to purchase their products and services.

Watch any Apple Keynote and you will hear references to how things "just work" on a Mac. This illustrates their believe that user experience is paramount and one of the best ways to ensure users have a good experience is to ensure that software and hardware just work together. They are best positioned to ensure things "just work" because they design all their hardware and write all their operating system software. For those things they do not do themselves (i.e., manufacturing), they hold their partners to very high standards which ensure that the end product "just works".

The Mac App store is a shining example of where Apple just leaves the competition in the dust. When I buy software, I tend to prefer to purchase software I can download. In part because I like the immediate gratification, but also because physical media typically gathers dust in my attic once the software it contains is installed. The download experience for stores other than the "Mac App Store" is generally the same:
  1. Browse the on-line store.
  2. Purchase the software.
  3. Download the software.
  4. Install the software.
  5. Enter my license key.
  6. Run the software.

With the Mac App Store, Apple has applied what they've learned from the iOS App Store and applied it to the Macintosh platform. The purchase experience for the Mac App Store is:

  1. Browse the on-line store.
  2. Purchase the software.
  3. Run the software once it is installed.
You never run an installer. You never apply license keys. You buy it and within minutes (depending on the speed of your Internet connection), you are using it.

And the best part of the Mac App Store, in my opinion, is that you buy the software once and install it on ALL the Macs that you own.

Apple did not invent the downloadable software category for the personal computer. However, they have made it the most user-friendly experience for finding, buying and installing software around.

Amazon's initial "answer" to the Mac App store is a step in the right direction; however, it is nowhere near as easy to use. Have a look at the Macworld article "Hands-on with Amazon's Mac Software Store". Amazon's freshman effort at a Mac App Store clone is a step in the right direction, but they have a lot of ground to make up.

Wednesday, May 11, 2011

Why I Do Not Miss Flash on my iOS Devices

I can honestly say that I fully support Apple's stance on Flash with respect to the iOS platform.

Back in 2002, when I started on my second entrepreneurial adventure, I reformatted the hard disk drive on my trusty Dell Latitude C840 and installed Gentoo LINUX as my primary operating system. One of the most frustrating things about my LINUX experience was the rather pathetic media support - something that I ultimately gave up on and moved the Mac. Support for standard formats such as MPEG-2, MPEG-4, and MP3 were plentiful. Support for proprietary file formats such as Flash, QuickTime, Windows Media was hit or miss. Most of the time, the best way to access the media files was to use the native player through an emulation layer such as WINE or a virtual machine. It was more trouble than it was worth.

On the web, the pervasiveness of Flash was incredibly annoying because there was no official Flash player available for LINUX. That didn't come out until January 17, 2007. While an official version for LINUX was a good thing to have, performance lagged behind Flash Player for WIndows. Adobe did what any company would do - they spent their resource dollars where it would get the most bang. Windows ran on 95% of the personal computers, why bother with a statistically insignificant OS like LINUX?

Probably more annoying than Flash was the preponderance of web sites that were designed specifically for Microsoft Internet Explorer. Microsoft makes great tools. They are extremely capable and allow lesser skilled developers to do some pretty amazing things. And they targeted those tools to produce code that worked well in their runtime environments - on Windows 96/98/Me/NT/2000 and IE. To run these sites "optimized for IE", I would actually have to run Internet Explorer. If I wanted consistent performance, I would have to run it in a virtual machine.

For me, the Apple vs. Flash issue is more about open versus proprietary. This isn't an iOS versus Flash issue. This is an HTML5 versus Flash issue. This is an open versus proprietary standards issue. With open standards, any company can produce a runtime that supports the standard. Consumers are not locked into a particular product because the cost to move to something else is too high (e.g., why Microsoft Office is so dominant). With an open standard, any company who sees an opportunity (and a profit motive) to produce a piece of software that will work with an open file format can sally forth and do so. Apple has iOS and Cocoa, Google has ChromeOS and Dalvik, Microsoft has .Net and Win32. All great platforms with their own unique strengths and weaknesses.

Flash was designed to bring multimedia to the web. It filled a void that desperately needed filling in the early days of the web. Now. It's time has past. The architects behind HTML and JavaScript got the message and their response has been mighty.

I am ecstatic that Apple, Google, Microsoft, and Mozilla are developing Safari, Chrome, Internet Explorer, and Firefox as "runtime" environments for the world wide web. Each company is constantly trying to one-up the rest of the pack and pushing back the boundaries of what is possible in a web browser. Google and the Mozilla Foundation are two companies that probably have the most to gain from standards-based development as both companies would likely prefer that people spend all their time in web applications. What is even better, in my opinion, is that Google and the Mozilla Foundation keep Chrome and Firefox fairly feature-comparable on the major operating systems available today - LINUX, Mac OSX, and Windows. Even Apple does a pretty good job of producing versions of Safari for Mac OS X and Windows.

All four companies are producing fantastic runtime environments for web-based applications. They each have their proprietary quirks, but those are the seeds of innovation. And they do not forgo standards compliance in pursuit of innovation.

The following site uses WebGL and is supported out-of-the box by the shipping versions of Chrome and Firefox. The Safari equivalent can be downloaded from and you can enable WebGL support by following some instructions to enable WebGL support.

Why waste time with a platform that is only be developed by a single company, when you have a platform that four large organizations are fervently competing to produce the best implementation? In the end, consumers win because you have choice. Run the OS you want to - the open, standards-based web will work.