Netflix’s Loss is Mobile’s Gain

The latest casualty of the earnings season is Netflix, whose numbers actually beat the Street’s estimates but who offered subscriber data and guidance that scared the stream-touched among the investment community.  There should have been no surprise here and the fact that the stock got punished for the expected means that people still refuse to understand the video dynamic.

People don’t want to pay for stuff, except where it makes them cool and attractive.  They try to get entertained for as little as possible, which is why cable companies have tended to lose subscribers to both satellite and telco competitors with lower prices.  Subscribers to pretty much all of the services cluster around the low-end offerings, not at the pricy top.  Given all of this, it should be obvious that most people aren’t going to pay for video if they can get it incrementally free.

Viewers in record numbers are finding the main networks don’t offer enough.  That pushes them to off-channel viewing more and more, and the more you view off-channels the more likely it is that you’ve seen the stuff before.  Production of material isn’t keeping up with incremental non-network demand.  It’s not that people want to cut the cord, but that they want another cord alongside that can deliver more viewing options.  The prime demographic for this is the young adult, from 20 to 30.  Netflix was a success because it filled the need of this age group.

“This age group” is the key here.  Penetration of Netflix beyond that key demographic is limited.  The younger types aren’t usually at home enough to view a complete show and would rather spend on other forms of entertainment.  The older types are first generally less online-literate and second tolerant and even interested in a broader range of material.  Netflix went into Latin America within the last year, proving that they needed new populations to pluck their key demographic from.  That’s also proof that exploiting a new demographic here is more difficult and expensive than entering a whole new country, or countries.

All of this is rooted in the fact that production of good network programming is tapering off.  Part of that is because the networks, like everyone else, are being pressured by the Street to turn in higher profits every quarter in a market that can create new eyeballs only by creating new humans.  Another part is that “marketing” in the broad sense is focusing differently because of the mobile broadband revolution.

The goal of marketing is to get somebody to buy something not by sticking the product into the person’s hands (sales) but by stimulating interest and a purchase decision.  A mobile user, out on the streets where the shops are, is clearly in a different phase of susceptibility than one at rest on a sofa in a robe.  Online advertising, directed at stationary/sedentary users, isn’t much different from commercials on TV, which is in large part why online ads have been in the net cannibalistic; they help reduce cost through targeting but don’t impact the purchase process differently.  Mobile ads, at least potentially, could revolutionize how we market.  It’s likely less about pure advertising than it is about personalized programs that start by generating a vague hunger and end with the buyer rushing into the fast food joint.  And it’s stealing marketing budgets from the networks, and from producing the shows.

The Netflix model isn’t going to work any better in the long run than the network-broadcast model.  The right answer here is TV Everywhere because it can coordinate content through the same marketing chain that mobile broadband supports, because mobile broadband can deliver it.  A common platform can link an ad in a show to a later follow-up coupon or offer when the person is near the point of sales execution, or even induce them to rise, change out of the robe, and go out into the real world.  Multi-screen, screen-switching, and mobile-based ad campaign-targeting are all possible.  Netflix can’t do them.  Thus, things aren’t likely to get better for these guys.

Mobile services are the engines of profit for the network operators, as both Verizon’s and AT&T’s results show.  Both providers have been taking the easy way out in mobile growth stimulation, which means relying on the coolness of Apple instead of doing something on their own.  AT&T now says that they’re going to launch their own Siri-like service, Watson, to be an agent in the cloud.  This is a development I’m sure you all know I’ve been talking about for some time, and it’s important not only because it would offer a framework for the operator to create its own mobile-campaign marketing plans but also because it would be the first step in transforming the Internet into “cloudnet”.  Mobile and content together are a powerful market driver; content alone (as Netflix is showing us) is a different facet of an aging market space.


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