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Industry: Netflix (Expanded Version)

By Roger Smith

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Netflix Graph

Almost 30 years ago, I spent the weekend visiting friends on Long Island’s North Shore. Also present at this impromptu house party was a professor of film at the Sorbonne, previously unknown to me. At one point, our hostess deputized me—as I was then an executive in the budding home video industry—and M. le Professeur for obvious reasons to run into town and make some appropriate movie selections from the local video store. After a quick examination of the store’s offerings, I somewhat sniffily declared the selection rather uninspiring. My cinephile companion responded: “I am not sure what you would consider a good selection. But I hope you know that, 10 years ago, this store would have been one of the 10 greatest cinematheques in the world.”

It was at that moment I realized that, in the long-ago days of the humble VHS cassette, the movie industry had placed untold cinematic riches on nearly every suburban street corner. Each store may have carried just 1,000 titles, nearly all Hollywood’s recent dreckBut a revolution had surely occurred. Indeed, only 10 years earlier, I had stood in awe of a friend—well-placed in the business—who owned his personal 16mm print of The Conformist, hauled out for annual living-room showings.

Fast forward to 1997 and the dawn of the DVD era. It wasn’t simply that the format was more convenient, offered far better picture and sound quality, and had great durability. It also could be stamped out in huge quantities at low cost. This led to what appeared to be a fundamental change in consumer behavior: DVDs were primarily being bought, not rented. Of course, most people still preferred to rent movies rather than own them. But the sheer inconvenience of procuring and returning discs—and paying those late fees—made the business ripe for a rental delivery system that matched the appeal of the product itself.

Barely two years into the DVD revolution, along came a few very bright people from—where else?—Silicon Valley who saw that the meteoric rise in the number of people with Internet access could obviate the traditional trip to the video store, and that a vastly expanded catalogue of movie selections could be quickly searched online. As for getting the DVDs to the customer and back, the answer was simple: the U.S. Postal Service.

Now, more than 11 years after the launch of Netflix, all of this seems totally intuitive. But it wasn’t back in 1999, nor was it by the end of 2002, by which time Netflix had lost over $150 million trying to establish its service. It had struggled to reach one million customers in three years, though by then it could offer those customers their choice among 14,500 different titles, both movies and television programs. Enormous financial success would follow in due course.

But this is not the history of that financial success, something of perhaps modest interest to Film Comment readers. Unfashionable as this may be, it is a valentine from a lifelong film lover to the company that has placed the wealth of cinematic achievement from all over the world, from the silent era to the present, in the hands of everyone in America, and recently in Canada, too, for a subscription fee of $10 per month. If you are one of the 20-plus-million people who subscribe to Netflix today, you may well already know whereof I speak—although I suspect that even the more dedicated Netflix subscriber will be surprised to learn of the riches available at the click of your mouse. And if you are a devotee of film but are not shelling out that monthly $10, pay attention as I acquaint you with what you are missing.

Netflix is the apotheosis of what marketers know as The Long Tail. This media concept  was popularized by Chris Anderson in a 2004 Wired article. Highly simplified, it states that the economics of the Internet allows companies like Netflix to profitably serve minuscule markets. Considerations of shelf space and threshold demand that used to drive decisions about “popular” entertainment have lost their tyrannical hold. When you read that Netflix offers over 100,000 individual titles—70 percent of them feature films with the rest mostly television programs—you gain an instant sense of how far beyond standard Hollywood fare their library must go.

Netflix offers the ability to watch any of these films on your home television—most via mail-order DVD, nearly all of which arrive within 48 hours of your ordering a selection. It also allows its subscribers to choose among a rapidly growing number of movies streamed (I’ll get to that soon) directly to that TV via the Internet. I realize there remains a small group of purists who insist that this is not the same as viewing a freshly struck print properly screened. It isn’t. But the entire revolution in media now taking place is about freeing the individual from someone else’s imposition of time and place. And, remember, we are talking about watching these movies on a 40-plus-inch flat-screen high-definition TV’s, now on offer at your local Best Buy for $500. Throw in a $200 pair of top-quality bookshelf speakers and you have a “home theater.”

Now, may I give you just a sense of the staggering selection in Netflix’s library? The following thoughts result from my highly arbitrary, in-depth perusal by director of this near-bottomless cache of catnip for the movie lover. As you may safely assume, the Hitchcock, Truffaut, Bergman, Hawks, Fellini axis is thoroughly covered. Rather than risk boring you with the detailed results of this research, and a tedious recitation of directors and how many of their films Netflix offers, may I instead just present a few canapés to whet your appetite? Here are some semi-randomly selected names whose career output Netflix covers either in toto or with only a few forgivable omissions: Samuel Fuller, Jack Hill, John Sayles, David Gordon Green, Ronald Neame, Nicolas Roeg, Jean-Pierre Melville, Louis Malle, Olivier Assayas, Seijun Suzuki, Kinji Fukasaku, Mario Bava, Aleksandr Sokurov, Béla Tarr, Lukas Moodysson, Wong Kar Wai, Kim Ki-duk, Arturo Ripstein, Ram Gopal Varma, Amos Gitai, and Guy Maddin. Is that list eclectic enough? May I rest my case?

Moreover there is a sequel to the Netflix story that will likely prove still more exciting for movie fans than the company’s achievements to date. And that is the whole concept of streaming. Netflix now has the ability to deliver films directly to your computer, your video game player, or—vastly more important—to your television. No more red envelopes, no more U.S. Postal Service, no more waiting even a day or two for that DVD to arrive.

With streaming, the longtime promise of video on demand is now a reality. Quite simply, what iTunes has done for music, Netflix has done for movies—but with one huge difference: iTunes bet, correctly, that people want to acquire songs one at a time and own them. Netflix has made a contrary wager: that a flat monthly all-you-can-eat subscription is the way to go for movies and that viewing a film once, rather than paying much more to retain a permanent digital copy, is what nearly all consumers prefer.  

The popular appeal of the Netflix approach is clear: Apple, seeking to achieve the kind of dominance in Internet-delivered movies that it has in music, made deals with all the studios to offer their titles to be downloaded (purchased) or streamed (rented) on a per-title basis. This method, known as “à la carte pricing,” is very popular with the studios, but it has been judged more or less a failure by U.S. consumers. Last year they spent about $200 million to buy movies from iTunes (at an average of about $12 each) and about $45 million to rent them for roughly $3 a viewing. By comparison, Netflix was pulling in a cool $2.2 billion from its happy subscribers who paid an average of $12.19 per month last year (down from $20.21 in 2003) for unlimited trips to Netflix’s movie smorgasbord.

If you sign up for Netflix today, you can elect to watch instantly any of the 35,000 titles that are currently available to be streamed for exactly $8 per month. For an extra two bucks a month, you also get to have one DVD out at a time by mail. This is strongly recommended, as most classic films are currently only available on DVD. However, this is rapidly changing. Netflix has, in less than two years, announced streaming deals with Warner Bros., Universal, Paramount, MGM, Lionsgate, Fox, NBC, ABC, Disney, MTV, and a host of indies. As their current product and—more importantly—their libraries work their way into the Netflix system, the offerings via streaming should soon be nearly as robust as those currently in DVD.

How does all this work? Surely you don’t expect this non-techie to explain it to you. But go to your local consumer electronics store and purchase, for no more than $130, a Netflix-enabled Blu-ray disc player. The salesperson will happily explain how to hook it up to your TV and you can be watching streamed movies that evening. Today there are innumerable makes and models of devices that attach to the TV and are capable of transmitting Netflix’s offerings. These even include mobile devices such as iPads and even iPhones. Before you ask who would watch a movie on a 3-inch screen, please remember that a big part of Netflix’s streaming business is TV shows, and a growing portion of their subscribers are in those younger demos—which do not regard viewing content on a portable device as the least bit ridiculous.

Netflix has now entered what it calls, with justification, a virtuous circle: its 20 million subscribers paying it some $200 million a month give it enormous clout with all manner of content owners, the studios very much included. (Their positive hatred for Netflix is not just because the company’s model delivers lower profits to the studios; it is because Netflix has, in the space of a decade, gained control of the entire digital delivery system for movies and TV programs.) Last year the company paid out over $400 million to secure streaming rights to content in a wide variety of deals, a figure that will almost surely increase this year. No other competitor can match that buying power, As Ted Sarandos, Netflix’s Chief Content Officer, put it to me: “We do not broadcast. We single-cast to a very large and very diverse audience.”

The reach of Netflix’s holdings was driven home to me last September, during the New York Film Festival. One of the sidebars of the 2010 event was a retrospective tribute to director Masahiro Shinoda. It had been my privilege to work with him on what became his final film, Spy Sorge. When I learned that he was to be present at a screening of one of his best-remembered films from the Sixties, Pale Flower, I invited Mr. Shinoda to join my wife and me for dinner after the screening. He accepted but told me that he did not wish to watch the film for the umpteenth time and offered to join us at the restaurant at the conclusion of the screening. Not wanting to make this lovely 80-year-old man wait two hours for dinner, I suggested that we repair to the restaurant immediately following his introduction, before Pale Flower was shown.

But this meant that I would have to miss one of the few Shinoda films that I had never seen. With a tinge of regret on my part, this became the plan. Returning home at 10 p.m. after a fine Chinese dinner, I thought to check to see if by some odd chance Pale Flower was available to be watched instantly on Netflix. Miraculously, it was, and I settled in to view a crisp black-and-white rendering of this beautiful film on my high-definition TV set. The next day, when my 8-year old daughter insisted we watch Home Alone 3—also courtesy of Netflix—I think I truly understood the meaning of The Long Tail.

Roger Smith is a former entertainment industry executive who is now a consultant on a variety of industry issues. He has been a happy Netflix subscriber since 2003.

© 2011 by Roger Smith

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