Author
Joel Espelien
Date
December 13, 2016

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Two interesting news items from Netflix this past week. First, Netflix (finally) announced that subscribers will be able to download shows for offline playback. Second, Netflix content head Ted Sarandos reiterated his view that Netflix likes sports, but only if it can invent a new sport and own the resulting league.

What are the common threads here? Two points.

1. Consumer Video is Becoming a Global-first Market
Goals matter. It’s very difficult to end up somewhere you don’t intend to go. The US media industry used to make US content for a US audience. A few business development people then tried to resell that content to other countries essentially at random. This resulted in a few shows that were big internationally (Baywatch, Friends, Prison Break), and hundreds more that weren’t. Hollywood has actually been ahead of the curve in this regard, which is one reason why we get an endless parade of superhero movies every summer. US audiences may be getting a little bored, but the reality is that special effects and cartoon plotlines travel well and are easy to market in 100+ different countries.

For its part, Netflix started out as a US DVD-by-mail business but has morphed into a global SVOD service. This affects both content as well as technology. Users in developing countries (i.e., Latin America) use smartphones as their primary screen. At the same time, these users tend to stay off of the 3G/4G networks with respect to streaming video. The data caps are too low and the subscription costs too high for most people. Instead, people divvy up their smartphone usage, consuming multimedia on WiFi networks, choosing games that allow offline play, and saving the cellular network for messaging and Facebook posts (as well as voice calls). The combination of these two things significantly limits the emerging market opportunity for Netflix. Instead of targeting the 50 million members of the emerging middle class, Netflix has mainly signed up relatively affluent households. In this context, adding the ability to download content is a really big deal. People can load their phones with Netflix shows while in WiFi coverage (either at home, work, or school) and then watch wherever and whenever they want. For cheap quantum viewing, it’s still the best solution out there.

What interests me most about this new feature is that the US is basically getting this feature as an afterthought. Netflix wants to stick with one common global platform. If users in emerging markets want downloadable content, then it’s easier for Netflix to just add the feature for everyone, including subscribers in the US. I believe this is a sign of things to come. US users are no longer the be-all and end-all of the consumer video market. Broadband video services need to offer the best experience they can to the biggest possible global audience, and let the chips fall where they may in the US. Sometimes this works great (i.e., the Olympics), sometimes it works ok (i.e., the World Cup) and sometimes it doesn’t really work at all (i.e., Formula One auto racing).

2. Sports Can Be Invented
Prior to 1891 there were no indoor team sports in the US worth noting. That December, Dr. James Naismith hung up a couple of peach baskets in a gym and grabbed an old ball. This year LeBron James will earn more than $30 million per year as arguably the best player in the world at the sport Dr. Naismith invented. To give a more recent example, the first snowboarding halfpipe competition was held in 1983 in Soda Springs, California. Olympic snowboarding gold medalist Shaun White now has his own clothing line and has an estimated net worth of $20 million.

The point is that modern sports were not handed down on stone tablets. They were all invented, and not really all that long ago in the greater scheme of things. There is also no evidence in either logic or the laws of physics that all possible sports have, in fact, been invented. In other words, there is absolutely nothing stopping Netflix (or anyone else) from inventing new sports. As with any startup, the risk of failure is extremely high, of course, but the possible upside is potentially enormous. Given the strategic alternatives available (i.e., compete with existing legacy media companies and bid billions of dollars for established sports rights), Netflix has at least three compelling reasons to try something new.

First, Netflix wants content that it can control exclusively. Even if Netflix licensed some high-level soccer content, there would still be a ton of other first-division soccer leagues around the world. No one soccer league is all that unique. By contrast, a league owned and controlled by Netflix that is formed around an entirely new sport could potentially maintain exclusivity for a long period of time. When done right, high quality leagues and events form natural monopolies because everybody wants to compete against the best competitors in the best events. This is why the NBA is so valuable (no other basketball league compares), and also why Wimbledon has been on top of the tennis world for over a century now.

Second, a startup league would allow Netflix to capture the lion’s share of the value. Current negotiations are strongly skewed in favor of the sports leagues to the detriment of media outlets. Many of ESPN’s current challenges stem from the prices it has had to pay to sports leagues for distribution rights. Yes, ESPN has generated profits, but the leagues generate more. Netflix sees an opportunity to nip this dynamic in the bud from the outset by controlling both the league and the resulting video entertainment.

Third, a new league controlled by Netflix would give the SVOD giant the opportunity to shape the competition around the SVOD experience (and not vice versa). Netflix has said the thing it doesn’t like about traditional sports is that the content is too outcome-focused. Once the result is known, the audience evaporates. Those who watched the event only want to see it once, while those who missed it are satisfied to read the score and watch some highlights on their phone. By contrast, there are several examples of sports videos on YouTube (e.g., Parkour, trick shots, and wild stunts of all kinds) that draw millions of views month after month with near-evergreen content. A sports league built around this type of content would have exciting live events, but the real value would be in the library of content that subscribers could download and watch over and over. My prediction is that Netflix is already crunching the numbers on a global Parkour league, and it wouldn’t surprise me at all to see them do something in the near future.

Conclusion
Successful companies continue to adapt and evolve, always looking for a new source of competitive advantage. Companies once thought Netflix was ‘just’ a Hollywood movie aggregator. Then competitors thought Netflix was ‘just’ a US premium channel with a few original dramatic series. Last year competitors found out that Netflix is serious about building a global video entertainment franchise. Netflix’ real competitive advantage is its control over a full-stack entertainment platform on a worldwide basis. With the ability to add complex new features like downloading, as well as the scale to launch its own original sports league(s), Netflix continues to separate itself from the rest of the field.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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