what netflix can teach newspapers

Posted on October 10, 2010


from newsonomics

Reed Hastings has been on a rollercoaster ride in the 13 years since he founded Netflix. From punchline to genius to toast to genius and back, several times over, it seems. In a talk Tuesday night in his hometown of Santa Cruz with TechCrunch’s Sara Lacy, so-sponsored by UC Santa Cruz, he talked about the ride and his learnings. He’s a thoughtful guy, with experiences well beyond the movie rental business. Most significantly, he’s a leader in education reform, and plainly well-informed about the news business crisis.

Though he mentioned the newspaper industry only in a single passage — “There’s a special case around newspapers that’s been different…a ton of highly profitable regional monopolies that employed way more journalists than you needed if you had national reach” — his building of a company with almost 10 million subscribers is noteworthy. That’s five times the number of subscribers of the country’s leading newspaper. The number, though, isn’t important; it’s the Netflix, and Hastings’, philosophy that’s worth applying.

Six quick lessons:

  1. Spend your time on tomorrow, not today: “The percentage of our time we spend on DVD by mail [still Netflix’s biggest revenue source by far] is tiny. We’re entirely focused on streaming.” Most newspaper companies’ organization and usage of staff time is focused on print. That means it is facing today, if not yesterday. Expend as few resources on the current operating model as possible, says Hastings, and run to the future. Put your best minds there — and most of your company. “We knew that the DVD business was temporary when we founded the company. That’s why we named it Netflix and not DVD by mail. We wanted to become Netflix.” Whatever the brand name, aspire to what and who you want to become.
  2. Savor the economics of digital distribution: “It costs us about a dollar, round-trip, to send DVDs by mail. It costs us less than a nickel to deliver by streaming.” Netflix now spends $600 million a year on the postal service [note to Jim Cramer: short USPS now!] and lots of hourly labor checking DVD quality. In the new world the costs evaporate — and quality and timeliness improve. For news publishers, the switch to digital media offers huge savings, at least 60% and probably more. Further, the switch removes concerns extraneous to the two things digital news companies will need to do: please readers and please advertisers.
  3. Don’t sweat the timeline: “In 1997, we said that 50% of the business would be from streaming by 2002. It was zero. In 2002, we said that 50% of the business would be from streaming by 2007. It was zero….Now streaming has exploded….We were waiting for all these years. Then, we were in the right place at the right time.”  Hastings’ point is that business strategy is about preparation, having a good sense of where consumer habits lie and then being ready to take advantage of them. Companies can’t predict timelines, dependent on technology and much else, but can be ready, when the market is ready.
  4. Play chess, not monopoly: If regional monopoly killed the old newspaper industry, then Hastings believes chess playing is basic to company comebacks. “The key here is to be a good chess player. The key to business strategy is to separate real threats from others. Blockbuster was concerned about VOD . They saw DVD by mail and didn’t think it was a threat. If they had launched [a Netflix-like service] a few years earlier [than 2004], they might well have won.” What indeed are the threats to the news industry? Is it that readers simply have to be “re-trained” to pay? Is it Apple’s new middleman role? Or is it the great ongoing advertising revolution, which is changing the whole nature of buying and selling, and may determine publishing fortunes far more greatly going forward? Hastings’ point: pick your spots.
  5. The presentation revolution is still to come: “The IP revolution gives you tremendous flexibility on interface.” An amateur historian of tech revolutions, Hastings ran through the decades of mobile phone change, reminding us the distance between Gordon Gekko’s big, blocky mobile phone on the beach in the original (1987) Wall Street, the intermediate steps of car phones, StarTacs, Palms and, finally, the iPhone. TV is in for the same revolution, he says, as the cable guides of today succumb to the Google TVs and Apple interfaces of tomorrrow. Lesson here for newspaper companies; think what kinds of presentations soak in the social, video and on-the-go tools of the day, the effects that clearly delight consumers. And don’t simply beat a retreat to the newsprint presentations that preceded Web 1.0.
  6. Culture counts. Hastings talked at some length about the culture he’s built at Netflix, a winner in “great places to work” contests. He talked about working in a place with people you want to work with and people who value excellence, chords that should send a shiver down the spines of too many news publishers. “If there is a God we worship, it is the god of excellence.”

Why didn’t Walmart kill Netflix, Lacy asked at one point, given its tremendous size and scale. Hastings turned the question, in part, back on the news business, “You could just have a bunch of news….”  His point, a big one for the news industry at this pivotal juncture: it’s not the stuff, it’s what you do with the stuff to please customers. Netflix isn’t about simply getting you a movie. It’s the recommendation engine and lists, the customer-pleasing, no-late-fees (remember when this was a huge issue), its easy-to-use interface and its social/sharing emphasis, among other features that let it distinguish itself in consumers’ minds.

In an age where, there are bunches and bunches of news, this point is a huge one. As the tablet age, in particular, dawns, it’s not about re-purporsing bunches of news; it’s about delivering that news in ways that delight and satisfy audiences. We’ve seen remarkably little innovation along those lines in 2010; will 2011 be much different?