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Photo by Brian Cantoni on Flickr

Photo by Brian Cantoni on Flickr

Netflix — the poster child for premium Internet video services — was birthed by iTunes and other online music services before it. Yes, movies and music are fundamentally different forms of media, but the online video guys can learn a lot from the transformation of the music business.  What works and what doesn’t.

Peter Csathy from TechCrunch says that three ingredients that have proven to be essential for the success of any online music service apply equally to the premium online video world. This trilogy represents the “Sacred Tenets of Online Media” that apply to any service provider.

Sacred Tenet #1 – Quality.

No brainer, right?  But how many service providers truly understand this? Remember the early online music services (both legitimate and not)? Audio quality was frequently abysmal.  I would argue that the quality of digital audio is still not good enough, but it is getting better.  The early audio experiences were usually empty (meta-data, what meta-data?), and the bad guys infected you with viruses. Enter iTunes, which offered a healthier, better sounding product and far richer overall experience. That mattered. That was a game changer.

The same applies, of course, for online video viewing, no matter how big or small the screen. To “win,” service providers must ensure that movies and television shows look good on every device regardless of the explosion of new devices, form factors, endless specs, new formats (MPEG-Dash, UltraViolet) and variable network conditions. Consumers don’t care, and they aren’t patient. Not anymore. They just want the stuff to work. And, that ain’t easy. That’s why Netflix transforms each movie into over 100 renditions to account for different devices, formats, and network conditions. THAT’s a commitment to quality.

Sacred Tenet #2 – Deep Content.

We live in a world where iTunes, Rhapsody and Spotify offer virtually any music track you could ever think of – 15 million of them! We take that for granted. We expect it. But remember, it wasn’t that long ago when that wasn’t the case.

In the earliest days of legitimate online music services, music libraries were small and filled with gaping holes (how’s that for an oxymoron?). iTunes launched with a scant 200,000 tracks back in April 2003. Think about that. Those numbers, of course, represent only about 1.5% of the total number of tracks now offered today. Ultimately, once customers got over the novelty factor of new music services, that paucity of content led to frustration – and opportunities to differentiate based purely on size.

This same basic truth applies to premium online video services of course. What happens when you can’t find the movie you want? You bolt and look elsewhere. Well, none of the service providers want that to happen, so each of them is feverishly racing to expand its cache of movies and television shows. That’s why you read about deal after deal after deal. It’s the quest to get the critical mass they need for their customers to stay.

Sacred Tenet #3 – Discovery & Navigation.

It’s essential for online movie customers to easily find the premium content they want, when they want it. But, it’s also essential for them to find a way to intelligently and easily navigate the vast expanding universe of other content that they don’t necessarily know they want – until it “finds” them and they experience it. That is the fundamental role of discovery.

The same holds true for premium video. As movie libraries expand online, it is essential to give the consumer powerful tools to make sense of it all. Many flavors of discovery exist, including social. Service providers will look to differentiate themselves here too as music services, like Pandora, do in the online music world.

iTunes got it right 10 years ago – and rules the online music world at least for the moment. But, things are very different in the online video world. Many hats are in the ring this time around. Netflix is the leader, but certainly isn’t a lock. And, Apple isn’t a significant player (yet). The players who pay homage to the Sacred Trilogy will best position themselves to be the big winners tomorrow.

This is an editorialized excerpt from a post by Peter Csathy from TechCrunch.  Peter is President & CEO of online video technology company Sorenson Media.

Here is a very interesting study of how Netflix took on the better financed and entrenched players of the day, and took over. This is a true digital revolution and a cash machine to boot. There is a lot to be learned here from studying this model. I invite your comments below.

Netflix is a solid example of the Long Tail concept.

“Customers have flocked to Netflix in part because of the firm’s staggering selection. A traditional video store (and Blockbuster has some 7,800 of them) stocks roughly 3,000 DVD titles on its shelves. For comparison, Netflix is able to offer its customers a selection of over 100,000 DVDs, and rising! At traditional brick and mortar retailers, shelf space is the biggest constraint limiting a firm’s ability to offer customers what they want when they want it. Just which films, documentaries, concerts, cartoons, TV shows, and other fare make it inside the four walls of a Blockbuster store is dictated by what the average consumer is most likely to be interested in. To put it simply, Blockbuster stocks blockbusters.

Finding the right product mix and store size can be tricky. Offer too many titles in a bigger storefront and there may not be enough paying customers to justify stocking less popular titles (remember, it’s not just the cost of the DVD – firms also pay for the real-estate of a larger store, the workers, the energy to power the facility, etc.). You get the picture – there’s a breakeven point that is arrived at by considering the geographic constraint of the number of customers that can reach a location, factored in with store size, store inventory, the payback from that inventory, and the cost to own and operate the store. Anyone who has visited a video store only to find a title out-of-stock has run up against the limits of the physical store model.

But many online businesses are able to run around these limits of geography and shelf space. Internet firms that ship products can get away with having just a few highly-automated warehouses, each stocking just about all the products in a particular category. And for firms that distribute products digitally (think songs on iTunes), the efficiencies are even greater because there’s no warehouse or physical product at all (more on that later).

Offer a nearly limitless selection and something interesting happens: there’s actually more money to be made selling the obscure stuff than the hits. Music service Rhapsody makes more from songs outside of the top 10,000 than it does from songs ranked 10,000 and above. At Amazon.com, roughly 60 percent of books sold are titles that aren’t available in even the biggest Borders or Barnes & Noble Superstores4. And at Netflix, over two-thirds of DVDs shipped are from back-catalog titles, not new releases (Blockbuster outlets do about 70 percent of their business in new releases). Consider that Netflix sends out 45,000 different titles each day. That’s fifteen times the selection available at your average video store! Each quarter, roughly 95 percent of titles are viewed – that means that every few weeks Netflix is able to find a customer for nearly every DVD that has ever been commercially released.”

From John Gallaugher David becomes Goliath – Netflix case study

There are many lessons in here for the music business to pay attention to.