Apparently it's impossible to be a monopoly without being abusive. (This weblog entry was derived from an email conversation with Dianne Marsh).

I first noticed this last fall, when TV series that usually come out on netflix DVD kept saying "unknown" for release date in the Netflix queue. Something was fishy, and it turns out they were holding these series back so they could use their "new, improved distribution technology."

I live out in the boonies so it takes two days for the post office to mail a DVD back to Netflix, and another two days to get a new one back to me. So if I mail it on Monday, I get a new one on Friday. Because I don't get cable, this is my only form of video so I have the highest Netflix plan.

And yet, It's not uncommon that it will sometimes take noticeably longer to get new ones, even when they've said they've turned it around in the usual way.

I've recently heard the term "throttling," whereby Netflix slows down my already slow flow of DVDs because it's convenient for them. Apparently it's the real thing.

But now Netflix is rolling out their "Watch Now" service, which is some kind of streaming video that only works through their special player. This requires PCs running XP or Vista (with IE). They've obviously never had the experience before of pissing off the Mac and Linux folk. Have fun with that.

This has been their business plan all along; from the very beginning they wanted to get into online video downloads. This is why they named themselves "Netflix" and not "Mailflix."

In response, Amazon sent out a message this morning where they talk about joining "The Online Video Craze" with their own service, Amazon Unbox. Here's Amazon's description:

Amazon Unbox is a video download store that has thousands of high quality TV shows, movies and more for you to purchase or rent. You can view these downloadable videos on your PC, your Portable Media Player, or your TiVo DVR. In addition, Amazon Unbox stores a copy of all purchased videos in an online storage locker for re-download at any time. So, videos do not have to eat up hard drive space, and no matter where you are you can download and play your videos.

Note that Amazon has thought this out a little better than Netflix. It doesn't stream, so you can view them away from the internet. It's far more likely that I'll want to have the portability. For example, not every hotel has internet speeds that support streaming. And what about traveling? Currently, I can bring my Netflix DVDs with me and watch them in full resolution without streaming hiccups. "Watch Now" looks like a step downward in a lot of ways, especially because it looks like I won't be able to have a choice about how I'm seeing video. Netflix has apparently been holding back the TV DVDs to force me to use "Watch Now."

Netflix loses its edge if Amazon can just jump in with a more useful service. This means Yahoo and Google can also just jump in. And as Dianne notes below, iTunes is already there, with a download, not a streaming service. I wonder if Netflix will find itself going back to the mail-a-disk solution, since that's their edge. Amazon, Yahoo and Google are much more powerful in the web space. Just look at the sophistication of their user interfaces, in comparison with the painful "refresh queue" experience from Netflix.

The good thing is that there will be competition, theoretically, and that should push Netflix back towards thinking about what works best for the customer rather than what works best for Netflix. It will be interesting to watch, but I seriously wonder about taking a business model that works well -- mailing DVDs -- and completely changing the customer experience. I would argue that it's a completely different company. It would make more sense to me to have started a separate company and left the DVD model alone, rather than putting a cork in the flow of TV shows (and possibly movies, but I haven't been monitoring that) and annoying your customers. It's not like we weren't going to notice that something was different when the TV shows stopped coming out on time.

Sure, it will be great to be able to see these things on impulse, but the quality is not going to be something I want to see on a large screen TV. And DVDs are not equivalent to streaming video. I've never had a streaming video experience that hasn't been annoying, and taken me out of the flow of the story. Anyone who thinks streaming is a good idea is doing it because it benefits them, not the recipient -- they want to control the experience of the customer. And they are actively ignoring one of the primary laws of the network: "the network is unreliable." So they've decided that controlling the customer experience is more important than giving the customer a good experience. So what if the customer has to put up with fits and starts? We can control what they see!

One of the bigger problems, as Dianne notes below, is that we will not get the benefit of the internet; we will have to wait until the season is over before seeing the shows. This means I'm more likely to go to a competitor to see shows that I'm really hooked on, and Netflix loses out on both timing and quality/user experience.

It's amazing how many of the really basic business mistakes get repeated over and over. One classic is changing the name of your business, which is almost universally disastrous. Then there's the inevitable "moving of the corporate headquarters" that always seems to happen when a new CEO is hired. A big study is always undertaken, and the results of that study always seem to firmly show that the best place for the new headquarters is whereever the new CEO happens to live. Imagine that. But the worst mistake a business can make is to stop thinking about what serves the customer. When that business starts to say "what serves me best" or worse, "what's the quickest way I can make the quarterly profit sheet look good," then they have lost their way. Fortunately, in the age of the Internet, the competitors are usually quick to step up and fill the void.

Dianne's Comments

(This section consists of commentary from Dianne Marsh).

I was surprised to see that Netflix was offering their downloads at no additional cost, 1 hr per $1 spent in membership fees. But I agree with you, unless they get some more downloads available (in particular, TV shows), they will lose. We already download TV shows for the current season, from ITunes, for $1.99 each. Those shows won't be available on Netflix until the season ends!

The HUGE disadvantage of Netflix is that it's streaming video. With iTunes, I can download and watch from my video ipod (which I did on the flight from Gunnison to Dallas on Saturday), or on my computer later. I don't have to download and watch right now. And, as we have both said, streaming video sucks. I've never had it work flawlessly ... always ran into some point where it had to buffer in the middle of watching something. I couldn't even watch your screencast with James (on the TG Address Book widget) without running into a buffering problem. I simply do not have the patience for streaming video. I want to know, WHEN I START to watch a show, that I will be able to watch it all of the way through.

BTW, I looked at the lineup for "Watch now" TV shows on Netflix. Nothing that is "current" is on there, yet. The only show that looks interesting to me is "Coupling", a BBC tv series which looks like a cross between Friends and Sex and the City. From my queue, the only movies that showed up were "Midnight in the Garden of Good and Evil", which I have wanted to watch for a while but have never rented, and "Crumb". So while I *may* try watching Coupling online, I have 2 movies here still that I haven't watched and another on the way. It's probably easier just to add it to my queue than to have it stream video.

So basically, I agree. I think that Netflix has to allow downloads of CURRENT stuff, not streaming video, in order to compete. My recollection of their initial business model was that they wouldn't ship videos at all. That once the technology was sufficient for downloads, they would simply have a subscription model that depended on people downloading what they wanted to watch, with X number of movies on their bookshelf at a given time. A local company, Media Station, had technology to do something in that regard, several years ago. Unfortunately the infrastructure wasn't there yet and they went out of business. As far as I know, their IP was deep-sixed, not sold.

As for streaming video, I can already get "this week's" shows for FREE from the network, and choose not to do that. Instead, I tape shows and watch later (we don't have DVR capabilities) or buy from iTunes. Again, I hate streaming video (ahem and the introductory commercials) and I'm willing to pay for the convenience of not having to deal with it.

I would bet that Netflix doesn't have the rights to the shows until after the DVD is released. They really need to change that. I read an interesting article in the in-flight magazine that talked about Netflix and "Red Envelope Entertainment." Red Envelope is the company associated with Netflix that secures rights to movies, and is also now funding Independent Films.

I blogged a while back about Netflix, and how I have a hard time believing that they have warehouses that stock the movies. If they have the proper privileges with the studios, they would warehouse NOTHING and burn DVDs on demand. The cataloging and warehousing sounds expensive to me. Of course, environmentally speaking, that would cause a lot of waste, but I would be pretty surprised to learn that my local distribution center had the old and fairly obscure movie "Thin Man" in stock (it shipped to me the same day that my last movie arrived). But there was a Newsweek article that strongly implied that they really DO warehouse the DVDs, complete with a photo of a guy thumbing through envelopes. I worked in a library for a while when I was in college and let me just say that things are EASILY misfiled, especially small envelopes like that. Whenever we had nothing to do, we sorted through the microfiche and we ALWAYS found something misfiled.

Another tidbit: if I put the DVD in the envelope with the barcode accessible, it seems to delay receipt at the distribution center. So either it screws up the mail service or they specifically use that for throttling if it's accessible. If I put the disk in so that the barcode window doesn't show the barcode, I almost always get my DVDs returned faster.

I think that the downloadable movies/tv thing is definitely a disruptive technology. Everything is in flux right now. The networks must be reeling. Network news is taking a hit from the internet (I can read the news I want, and blow past the stuff I don't want, and I'm not annoyed by the "teasers" designed to keep me glued to the tv). In fact, I don't even turn the TV on anymore, unless we are watching a movie. I don't remember the last time I watched TV news. I don't watch weather on the TV -- it makes more sense to get it from my computer. So what does that mean for advertisers? What does it mean for the future of TV when I can download tv shows to my ipod for later viewing to avoid the commercials? I guess it means that avoiding the commercials is worth $2 for me, at least.

I just saw an announcement that NBC is selling downloads of shows to mobile phones (http://news.yahoo.com/s/nm/20070314/tv_nm/nbc_wireless_dc) for $1.99 for a 24 hr period. Ahem fine, but what if I don't have time to watch them in that timeframe. Stuff happens. I download a show so that when it's CONVENIENT I can watch it, not to match a deadline (reeks of late fees). That's why I avoid the local video store ... because my life is too uncertain to know if I can ABSOLUTELY finish watching a show in a particular window.

NBC's model is flawed, IMO. They will fail, I predict, and have to choose another avenue. But the fact that they are trying different things really underscores that this is a disruptive technology that many are trying to figure out how to manage.

Final notes from Bruce

Talk about disruptive: apparently Google TV, a regular cable station, contains the best of the videos on google video, so you don't have to go hunting and viewing them a streams. And what's really fascinating is that the commercials are also created by users, and the advertisers pay a tiny amount (maybe $1000) to the winner of a contest to create the ads (and the ads themselves are apparently much more interesting to watch as a result). Fascinating: it completely turns the production of both media and ads upside down.

At the end of the JavaPosse Roundup, we had an interesting experience spontaneously form -- people connected their computers to my new TV screen and took turns showing favorite clips and items from the web. Not only was it much more interactive, with people making suggestions on a regular basis, but the things we saw were far off the map of what the networks normally want to feed us. I have to admit, I didn't see the whole "VJ" thing coming, but it's certainly a different way to consume video. I can imagine people creating lists of selections that will automatically play in sequence (possibly with commentary from the lister in between, like a film festival). Or even something like pandora.com (which uses an algorithm to select music you'll probably like) but for video.