Analysis of the Online Video Streaming Industry with an Emphasis on

By Lev Williams Kevin Warnke Nate Loop Chris Hong Josh Sheline

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Table of Contents

1. INTRODUCTION 3

2. HISTORY 5

3. OVERVIEW 8

4. TRENDS & CHALLENGES 14

5. EMPLOYMENT 24

6. FORECAST OF MAJOR ISSUES 33

7. CONCLUSION 42

8. WORKS CITED 45

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Introduction

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

1. INTRODUCTION

The purpose of this report is to analyze the Online Video Streaming Industry, and specifically focus on the dominant service provider, Netflix. This business report will briefly discuss the history of the industry, an overview of the industry, expertly discuss the trends and challenges, observe the employment prospects and work environment, and give a forecast of the industries issues. While Online Video Streaming is clearly a new industry that has yet to mature, it has shown potential to completely change the way people traditionally view movies, and television shows.

The first section of the report will discuss the history of how the industry started, and what significant events influenced Netflix’s decision to enter the online video streaming industry. Such events include the start of streaming with RealNetworks and the popularization by YouTube.

The second section of the report will be a general overview of the industry, and discuss the key competitors in the industry. The overview will also discuss the exponential growth the industry has seen as well describe the impact that streaming has on people’s lives.

The third section of the report will be the trends and challenges seen in the industry. This section will be exemplified by observing Netflix. Trends include global expansion efforts, subscriber growth, and the increasing amount bandwidth demanded by streaming. Challenges seen by Netflix include rising content costs, and increased competition.

The fourth section of the report will discuss the employment prospects and work environment in the online streaming industry. This section will detail the problems of a rigid management structure in the online streaming industry, and attempt to support the argument for deregulation of employment policies. Again, Netflix will be the main research object.

The fifth and final section of the report will be the Forecast of the Major Issues. Because online streaming is a relatively new industry and technology advances quickly, it is difficult to ascertain the path the industry will likely take in the future. The forecast will examine the options and possibilities that could transpire in the future.

Our goal as a group is to analyze the online video streaming industry with an emphasis on Netflix. This analysis will provide valuable insight regarding the industry through an organized and effective manner. Through this business report, we hope to explain the major advantages and disadvantages regarding the industry, and provide further knowledge of the direction the industry is moving.

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix History

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

2. HISTORY OF THE ONLINE VIDEO STREAMING INDUSTRY

The very first instance of streamed audio over the internet occurred in a baseball game between the New York Yankees and the Seattle Mariners in 1995 by the efforts of RealNetworks.1 The concept of streaming would evolve into becoming one the most perennial uses of the future.

How the Online Streaming Industry Got Its Start

The success of the online video streaming Industry has been influenced by many factors such as the popularization of YouTube as well as the convenience that it brings. The idea of using the Internet as a medium for videos has been immensely popularized by the success of YouTube. Founded in 2005 by former PayPal employees Chad Hurley, Steve Chen, and Jawed Karim, YouTube has significantly grown into being one of the most prominent websites today.2 Through simply streaming videos and posting them online, people were able to watch a plethora of content provided by users themselves. YouTube made users used to the idea of streaming content online and there was clearly much potential in online streaming for businesses.3

The online streaming industry was heavily influenced by the emergence of Videos on Demand, a strategy by cable companies to navigate the convergence of film, cable and the internet as a platform and revenue stream.4 Videos on Demand allowed users to watch movies from homes at the control of a remote, similar to the convenience of streaming movies and TV shows through the internet. Videos on Demand was a new model for and a new feature for cable subscribers, yet it did not find the level of success that the online streaming industry has found.5

The first significant use of the online streaming of TVs and Movies first occurred with Netflix in 2008. In that year, Netflix offered a service that streamed TV shows and videos online through Microsoft’s Silverlight.6 The company that initially offered through mail rose to prominence and paved the way for the distribution of content from TV shows

1 "RealNetworks, Inc." Fundinguniverse Website, http://www.fundinguniverse.com/company- histories/RealNetworks-Inc-Company-History.html?currentPage=all, accessed February 2012. 2 “History of YouTube,” Article Alley, March 31, 2010. http://artlaco.articlealley.com/history-of-youtube- 1482289.html, accessed February 2012. 3 Ozer, Jan. "Netflix Everywhere: Sorry Cable, You're History." Wired Magazine, http://www.wired.com/techbiz/it/magazine/17-10/ff_netflix?currentPage=all, accessed February 2012. 4 Lucas Hildebrand, “The Art of Distribution: ” Film Quarterly, Vol. 64, No. 2 (Winter 2010), pp. 24-28, via JSTOR, accessed February 2012. 5 Ibid. 6 Topolsky, Joshua, “Netflix Finally Brings Watch Instantly to Macs via Silverlight” Engadget, October 26, 2008, http://www.engadget.com/2008/10/26/netflix-finally-brings-watch-instantly-to-macs-via-silverlight/, accessed February 2012.

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

and movies through online streaming. online streaming quickly became a significant option of how TV Shows and Movies are now viewed today. Netflix pioneered the way Americans were accessing videos and movies through online streaming and reaped huge profits by doing so. Their move to start “Watch Instantly” proved to be extremely beneficial. In 2010 Netflix stock prices were at $175 a share from $29 in 2008.7

Netflix’s move into using online streaming as a major distribution of videos on demand was undoubtedly a key moment in the start of the online video streaming industry. Many companies such as Apple, Fandor, , and Blockbuster quickly joined in hopes to achieve similar success. Companies such as Hulu emerged in hopes to compete in the trending industry. Through its relatively short history, it is clear that Netflix has dominated the online video streaming industry. However, with the increasing competition and upcoming challenges it faces, it will be interesting to see if there will be a dominant driver in the industry to shape its growing history.

7 Netflix, “Netflix’s Investors Relations – Historic Stocks Lookups,” Netflix Company website, http://ir.netflix.com/stocklookup.cfm, accessed February 2012.

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Overview of the Industry

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

3. OVERVIEW OF THE ONLINE VIDEO STREAMING INDUSTRY

The way movies, television, and music can be viewed, and listened to have literally changed in front of our eyes. The online streaming industry is currently evolving at a rapid pace, and shaking up the market shares of previously well established companies. We are currently living and experiencing the transformation into a digital age in which movies, television, music, photos, games, ‘apps’, and any other form of media can be downloaded directly to one’s computer, cellphone, or tablet. The online streaming industry is still considered a recent innovation in media consumption, and has expanded at an exponential pace. We will focus our research primarily on the online streaming of movies but will continue to research the entire industry, including, but not limited to, movies, television, and music. The online streaming industry has numerous competitors for each genre of digital media. However, we will focus our case study primarily on Netflix for the streaming of online movies and TV shows. Although we recognize that online streaming has other major contenders such as Hulu for online television, Prime for Movies, and YouTube for online music and miscellaneous content, we will concentrate predominantly on Netflix. The online streaming industry has had profound effects on: production companies, movie theaters, television stations, cable companies, record labels, and the manufacturers of DVD’s and CD’s. We will direct our attention to these effects, as well as the changes companies are making in order to keep up with online media and maintain their current market share. For example, Blockbuster’s shift online, and ’s employee-less movie rental stalls.

The online streaming industry is still expanding, and yet it is already enormous, almost beyond measurement. Less than ten years ago one would have to physically go to a movie theater or , whereas presently one is able to stream any media imaginable from your computer or phone. This shift is quite a phenomenon. The streaming of media was recently seen as a luxury, yet is now critical to the success of a multitude of companies. was once used solely for entertainment purposes, but is now seen as, “a vehicle for organizations to market, sell, and support their products and services, as well as for internal communications and training.”8 Streaming has become extremely important in regards to advertisers, as they can pay to play small clips of their product before or in between online content. Nearly every big corporation has begun streaming commercials and advertisements online across multiple internet platforms. A study by Edison Media Research, “finds that, as of July 2001, the number of individuals who have watched or listened to streaming media online has risen to 52% of online Americans.”9 This study was done over 10 years ago, when online streaming was in its infant stages, and its true potential was yet to be

8 Jan Ozer, “What is Streaming?” Streaming Media, February 26, 2012, http://www.streamingmedia.com/Articles/ReadArticle.aspx?ArticleID=74052, accessed February 2012. 9 Michelle Manafy, “Half of Net Users have tried Streaming,” EMedia Magazine, vol. 14, no. 11, November 2001, Business Source Complete, EBSCO. 9

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

comprehended. The exponential growth of these three products, as well as the creation of ‘apps’ has caused the internet and streaming in general to explode in popularity. In a recent study done by Comscore, 138 million viewers streamed online video last year, which represents about 75% of American internet users.10 Thus within a matter of years, a quarter of the entire internet population has begun streaming content from online. Streaming is being used by more and more people because the internet is expanding to more markets and is moving from luxury to absolute necessity. Also, the way people access the internet was once limited to expensive desktop computers, but is now accessible on nearly every electronic device.

Netflix, for example, the leading online movie streaming site has more online subscribers than any other video service in the United States, at 22.8 million in early 2011.11 “Some analysts have speculated that the company could pass the 30 million subscriber mark by the end of the year.” 12 Netflix is still growing as they have only recently begun streaming movies online instead of mail order DVD’s. Netflix recently signed over one billion dollars in deals with most major production companies to have exclusive access to stream movies online including: FilmDistrict, Lionsgate, MGM, Paramount, Relativity Media, Epix, Warner Brothers, Fox, and Universal.13 The signing of exclusive deals with these production companies will seemingly only boost Netflix sales as there, “reported worldwide revenue of $719 million for the quarter, up 46 percent over the same period last year.” 14 Netflix is growing at a ridiculously fast pace, and is refocusing their priorities from mail-in DVD’s, “into a service focused on streaming movies and TV shows over the Internet.” 15 Netflix is the definition of a high growth company, adding millions of new subscribers every quarter, cementing the idea that streaming is still in its early phases.

Hulu is another example of a new online streaming website. Hulu is different from Netflix in that they specialize in TV shows. Hulu allows viewers to watch a limited amount of their favorite TV shows for free. Hulu recently announced Hulu Plus as a way to compete with the Netflix model. Hulu Plus is a, “subscription service that offers a deeper catalogue of shows

10 Steve Smith, “Online Video’s Tough Calculus,” Min’s B2B, vol. 11, no. 24, June 23, 2009, Business Source Complete, EBSCO. 11 Brian Stelter, “For Netflix, Higher Earnings and a Milestone,” , April 25, 2011, http://mediadecoder.blogs.nytimes.com/2011/04/25/for-netflix-higher-earnings-and-a-milestone/, accessed February 2012. 12 Ibid. 13 Sara Yin, “Netflix Inks Content Deal for 2011,” Personal Computing Magazine, December 1, 2010, http://www.pcmag.com/article2/0,2817,2373690,00.asp, accessed February 2012. 14 Brian Stelter, “For Netflix, Higher Earnings and a Milestone,” The New York Times, April 25, 2011, http://mediadecoder.blogs.nytimes.com/2011/04/25/for-netflix-higher-earnings-and-a-milestone/, accessed February 2012. 15 Sara Yin, “Netflix Inks Content Deal for 2011,” Personal Computing Magazine, December 1, 2010, http://www.pcmag.com/article2/0,2817,2373690,00.asp, accessed February 2012. 10

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

and compatibility with more devices than the free, basic Hulu service.”16 Hulu Plus will allow users to watch full seasons of television shows as opposed to buying the season on DVD, or trying to plan their lives around their favorite TV show. 17 Hulu brazenly announces on their website that their mission is “to help people find and enjoy the world's premium video content when, where and how they want it. As we pursue this mission, we aspire to create a service that users, advertisers and content owners unabashedly love.”18 Hulu’s mission essentially spells out that online streaming has only touched the tip of the iceberg, and that there is a lot more for online streaming companies to accomplish.

YouTube is without a doubt the most well-known online streaming website. Their content ranges from: music, music videos, short clips, TV shows, movie trailers, and user generated content. Nearly any type of media content can be accessed on YouTube. YouTube was launched in 2005, and in seven short years has clearly become the biggest online streaming website in the world. YouTube claims to exceed two billion views per day, as well as over 24 hours of video content uploaded per minute. 19 The United States Congress, President and even the Vatican have their own unique channels on YouTube. YouTube has been localized in 22 different countries, and the automatic speech recognition technology accurately translates 51 different languages.20 While Netflix and Hulu are still mainly based out of the United States, YouTube has expanded worldwide with over 70% of daily traffic coming from outside of the United States. 21 Streaming is clearly a technology to be reckoned with; the number of users accessing different sites daily makes a statement that this industry is vital.

Putting into words how useful and seemingly essential online streaming has become is virtually impossible. The amount of content that is on the internet is endless, and literally cannot be directly measured. It is a network which crosses over all seven continents and a majority of the world’s countries. According to Internet World Stats, 245 million Americans accessed the internet last year, which is 78% of the population compared to the world average internet users which was 27%.22 While some countries are not yet as ‘connected’ as the United States, it is still very clear that streaming and the internet has caused a lot of changes. Companies are going bankrupt, changing marketing strategies and even industries, creating new departments and completely eliminating others in order to keep up with the trends of the internet and streaming. For example, Blockbuster is in bankruptcy because

16 Jeffrey Wilson, “Hulu Plus,” Personal Computing Magazine, June 14, 2011, http://www.pcmag.com/article2/0,2817,2366593,00.asp, accessed February 2012. 17 Ibid. 18 Hulu.com, “About,” http://www.hulu.com/about, accessed February 2012. 19 Website Monitoring, “YouTube Facts and Figures,” Site Impulse, May 17, 2010, http://www.website- monitoring.com/blog/2010/05/17/youtube-facts-and-figures-history-statistics/, accessed February 2012. 20 Ibid. 21 Ibid. 22 IWS Usage and Population Statistics, “Internet Users in North America,” Internet World Stats, June 26, 2011, http://www.internetworldstats.com/stats14.htm, accessed February 2012. 11

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

online streaming companies such as Netflix can stock way more DVD’s than a physical store. “The company provides more than 100,000 DVD titles which is not possible for outlets.”23 This is because Netflix has warehouses opposed to outlets, which generally dedicate massive amounts of space to new releases.

The modern world is so interconnected that one can live stream an Italian soccer game from across the world by simply searching for what they want to watch. A television premier that you missed can be instantly streamed online an hour after it was aired. There’s no need to wait for CDs, as soon as a song is heard on the radio it is without a doubt already posted on YouTube, music sites, Facebook and blogged or Tweeted by the artist themselves. The day a movie is released in theaters it can be illegally watched online, and the day a movie is released on DVD it can be legally watched in HD online. The streaming industry has grown so fast and caused such rapid technological growth that video streaming has become more than just entertainment it has become an internet revolution. Consumers want video to watch, they are tired of plain text websites, they want animation, pictures, things that catch their attention. “The transformation can be attributed to the growth of the internet and changes in technology and consumer behavior.”24 This transformation from information based sites, to entertainment based sites is caused because of how fast the internet is growing. The director of Google content partnerships, Gautam Anand said, "The internet has grown much faster than other mediums. In the US, the internet took three years to reach 50 million people; while TV took about 15 years to reach the same number of people," Anand revealed, “that about 1.7 billion people connect to the internet via PC; and 4.6 billion connect via mobile devices.” 25 With a world population of slightly fewer than 7 billion people, means 66% of the World’s population has connected to the internet via mobile device.

Online streaming has become much more personal as well. There are complex algorithms that have the ability to direct advertisements towards an individual’s behavior. Past searches and preferences are all taken into account and ads pop up that are directed towards you specifically. The era of tuning in once a week for your favorite TV show is ending. Streaming has allowed personalization beyond all measures; you can watch what you want, anytime, anywhere, from nearly any kind of electronic device with an internet connection. With the expansion of Wi-Fi and 3G cellphone service, not having internet is now a rarity.

In America it has been determined that internet use has risen 20% in the past year, to a level that the affluent American is online 30 hours a week.26 Affluent Americans, specifically,

23 Netflix Inc. SWOT Analysis, pg. 1-9, October 2011, Business Source Complete, EBSCO. 24 Kapil Ohri, “Video Content Industry is Undergoing Massive Transformation,” Agency Faqs, September 30, 2010, http://www.afaqs.com/news/story.html?sid=28402, accessed February 2012. 25 Ibid. 26 European Travel Commission, “United States Demographics,” New Media Trend Watch, March 7, 2012, http://www.newmediatrendwatch.com/markets-by-country/17-usa/123-demographics, accessed March 2012. 12

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

“Millenials, defined here as those aged 18 to 29, spend more than 40 hours a week online, essentially a full-time job.” 27 It has been shown that media usage in total has been increasing, yet the forums of media have been changing. TV has remained steady, while internet usage and mobile device usage has increased, and at the same time newspapers and magazine usage has fallen according to New Media & Trend Watch.28 It has also been shown that the average age of internet users has risen proportionally with the age of the general population. In terms of ethnic representation, Caucasians have been proportionally represented online, while Blacks and Hispanics have been underrepresented. 29

The streaming industry and internet are no doubt huge. Online streaming and the internet are consistently growing larger, with the number of sites, amount of data online, and the quantity of users increasing daily. Americans are very connected and have the most advanced online streaming companies available. With Netflix, Hulu, and YouTube clearly demanding a majority of the online streaming market share, they are increasing in size as we speak. Over 70% percent of American’s have access to the internet, and people’s lives are affected everyday by what they can watch and stream online. Everyone is affected by streaming differently, while some users stream a movie a night, and 50 songs a day, others simply watch a couple of YouTube videos a week. All in all, online video streaming has become an essential part of our lives. The drastic amount of change that has occurred in the recent decade has changed society and cultural norms, as people are exponentially more connected. Staying in contact is much easier, seeing what others are doing, watching, or listening too is now done with a click of a mouse. The online streaming industry is so young, yet so involved in people’s lives that it’s impossible to know what is going to happen next, or who the next Netflix, Hulu, or YouTube is going to be.

27 Ibid. 28 Ibid. 29 Ibid. 13

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Trends and Challenges

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

4. TRENDS & CHALLENGES

Evolution of the Online Video Streaming Industry

Hundreds of years ago, mankind relied on the use of whale oil as a major source of lighting. However, this use has been completely diminished and obsolete as inventions such as the light bulb took its place, helping shape modern society. Though an extreme example, one can see a similar trend today with the online video streaming industry. The industry of video streaming has been growing rapidly primarily as a result of advances in technology. Technological innovations and internet streaming have greatly impacted various industries such as movies, shows, music, and books. For example, the “reason that every major book publisher owns huge, half-empty warehouse and distribution facilities is that more books are being delivered electronically.”30 The music and printing industries have greatly been affected due to advances in technology, leading many to believe that the same will occur to DVD sales and cable contracts. Movies, for years, have had the system of premiering in theatres, moving to DVD sales, then to premium channels such as Starz, and finally ending up on cable channels. Recently, however, “the six largest publicly traded cable- and satellite- TV providers announced a combine loss of about 580,000 customers in the second quarter— the biggest decline in history.”31 Some industry analysts attribute this decline in customers to the state of the job market and the price of cable television, but one must not disregard the impact made by video streaming. This system has been in place for many years, but it is apparent that changes are coming forth due to the emergence of video streaming and its utilization by corporations such as Netflix.

Industry Trends

The immense growth in the industry of data streaming can be seen through Netflix Corporation. Netflix initially started out as a subscription-based digital service company that charged a flat rate to send DVDs by mail. In 2008, with fewer than 9 million subscribers, the corporation began to offer video streaming directly to the home television with its Watch Instantly feature, and that move has spurred 10 consecutive quarters of accelerating subscriber growth.32 Although there are many factors that can be attributed to the recent successes of Netflix, the introduction of the online streaming of movies and television shows directly to consumer homes has had the greatest impact. The ability to stream thousands of

30 Jonathan A. Knee, “Why Content Isn’t King: How Netflix Became America’s Biggest Video Service─Much to the Astonishment of Media Executives and Investors,” Atlantic Monthly, July-August 2011, pp. 34-38, Academic Search Complete, via EBSCO. 31 Andy Fixmer, “New TV Season, and Fewer People to Watch It,” Bloomberg BusinessWeek, September 19, 2011, pp. 24-25, Business Source Complete, via EBSCO. 32 Jonathan A. Knee, “Why Content Isn’t King: How Netflix Became America’s Biggest Video Service─Much to the Astonishment of Media Executives and Investors,” Atlantic Monthly, July-August 2011, pp. 34-38, Academic Search Complete, via EBSCO. 15

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

movies and television shows at one’s own convenience is gaining significant popularity. Streaming unlimited movies and television shows at a flat rate allows consumers to avoid the inconvenient costs associated with renting from video rental shops such as Blockbuster and . At movie rental stores such as Blockbuster and Hollywood video, customers would have to pay per movie and late fees if necessary. With Netflix and its online streaming feature, one has access to thousands of movies and television shows at a flat rate. The emergence of video streaming and the rise of Netflix can be seen in the subscriber graph below. Netflix has only lost subscribers twice in the past 10 years; once in 2007, and more recently in 2011. For the purpose of this report, the loss in 2007 can be disregarded as it was before online video streaming was an integral part of Netflix. The loss in 2011 was a result the loss of Starz and the company’s attempt to separate its mail-in DVD and streaming services. However, Netflix has signed deals with corporations for streaming rights and immediately brought its two services back together following the backlash. They are insightful and admit the separation of services was a major mistake, and they expect to continue growing.

Figure 4.1: Netflix Subscribers in the Past 10 Years

Source: Dan Frommer, “Netflix: 10 Years in 3 Charts,” SplatF website, http://www.splatf.com/2011/10/netflix-10-years/, accessed March 2012.

There has been an increasing use of internet streaming for movies and TV shows since Netflix introduced Watch Instantly. For example, “the Netflix service accounts for a fifth of downstream traffic on U.S. broadband networks, and the company says 66 percent of its subscribers watched at least a portion of a TV show or movie streamed during the third

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

quarter, up from 41 percent a year earlier.”33 This statistic does not even account for the downstream traffic on U.S. broadband networks caused by the other companies that offer video streaming such as Hulu, Amazon, and Blockbuster. The graph on the next page shows the top sources of internet bandwidth traffic in North America as of March 2011. One can see that Netflix accounted for more than a fifth of the downstream traffic in March of 2011. Other providers of streaming video content such as Flash Videos, iTunes, Hulu, and YouTube also make up a great deal of the traffic. Although the data is from a year ago, it still shows how much the industry of streaming movies, TV shows, and video clips has achieved incredible growth in the past few years. Also, one can assume that the video streaming industry currently causes more internet bandwidth traffic than last year as a result of the growth of Netflix and other corporations entering the industry.

Figure 4.2: Top Sources of Internet Bandwidth Traffic in North America

Source: Justin Fritz, “A 2,150% Power Boost That Could Ease the Cable Crunch,” Wall Street Daily website, http://www.wallstreetdaily.com/2011/06/24/cable-company-broadband-upgrade, accessed February 2012.

Another trend with Netflix is its expansion into foreign countries. It has shown its dominance in the United States and looks to expand to the global market. Many corporations are entering the online video streaming industry due to its growth, so Netflix must be the first to enter into

33 Paul Bond, “Is Netflix Good for Hollywood?,” Hollywood Reporter, January 19, 2011, pp.54-57, Business Source Complete, via EBSCO. 17

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

foreign countries. Netflix understands that it must establish presence globally to maintain its dominance in the online video streaming industry. It began its global expansion by “adding 34 Canada in 2010 and 43 countries in Latin America and the Caribbean in September 2011.” In the first quarter 2012, “the leading global internet subscription service for films and TV programs, launched in the United Kingdom and Ireland, offering instant and unlimited access to a broad range of entertainment for the low monthly price of 5.99 Pounds Sterling in the UK and euro 6.99 in Ireland.”35 People in these countries can now enjoy movies and TV shows when and where they want. Netflix is revolutionizing the way people around the world are watching movies and TV shows as it has “more than 20 million streaming members in 47 countries and territories.”36 Netflix will continue its growth and dominance in the global market as long as it is able to fulfill subscriber needs.

A majority of Netflix subscribers utilize the Watch Instantly feature as it currently provides subscribers with access to over 17,000 movies and TV shows. In order to maintain its growth and enhance the online video streaming service it offers, Netflix must sign and maintain contracts with corporations to gain valuable streaming rights to premium content. Any increase or improvement of the selections available in the Watch Instantly section would attract more customers. Netflix understands the growing appeal of having the ability to stream movies and TV shows at one’s own convenience with the click of a button as it has made its way “onto more than 700 kinds of devices, including HDTVs, game consoles, smartphones, and tablets.”37 Netflix has made many recent agreements with television and movie studios to gain the streaming rights for their content. It has announced a two-year, non-exclusive licensing agreement that will allow select TV shows from CBS’s library to be streamed instantly from Netflix beginning in April; this makes Netflix the only premium subscription service with shows featured on all four broadcast networks and dozens of cable TV’s biggest brands.38 Netflix has also finalized a deal with the cable network Epix “through roughly 2076 to offer films from Lionsgate, MGM, and Paramount 90 days after they debut on the channel; and analysts believe that Netflix will pay $200 million per year.39 Pacific Crest Securities analyst predicts that “Netflix will spend $1.4 billion on streaming television and movie content this year and $1.8 billion next year.40 One can see the efforts on the part of

34 “Netflix to Launch Service in the UK and Ireland for Streaming Movies and TV Shows in Early 2012,” PR Newswire US, October 24, 2011, Regional Business News, via EBSCO. 35 “Netflix Launches in the United Kingdom and Ireland,” PR Newswire US, January 9, 2012, Regional Business News, via EBSCO. 36 Ibid. 37 Harry McCracken, “Control Freaks,” Time, January 9, 2012, pp. 50-51, Business Source Complete, via EBSCO. 38 “CBS/Netflix Sign Two-Year Content Licensing Pact,” CD Computing News 25, no. 3, March 2011, pp. 1-3, Academic Search Complete, via EBSCO. 39 Paul Bond, “Is Netflix Good for Hollywood?,” Hollywood Reporter, January 19, 2011, pp.54-57, Business Source Complete, via EBSCO. 40 Donna Howell, “Netflix and Friends Move to More TV, Original Shows,” Investors Business Daily, March 2, 2012, p. 1, Business Source Complete, via EBSCO. 18

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Netflix to maintain its growth and satisfy its subscribers. Netflix is attempting to expand its selection of movies and TV shows, but it will be hard with the increasing costs and other challenges facing it.

Central Challenges Facing the Industry

One of the main reasons an online streaming company such as Netflix was able to efficiently utilize its Watch Instantly feature was the relatively cheap contracts it signed with corporations like Starz for streaming rights. In order for a company in the online streaming industry to stay relevant and provide customers with access to an immense library of movies and TV shows, it must sign contracts for streaming rights with corporations. However, now that corporations and content providers understand the growth and profit in video streaming, they refuse to sign streaming rights contracts for cheap prices.

The contract challenges can be observed through Netflix as “the cost of its new deals to acquire content for streaming has so far this year increased nearly eightfold from 2010, to $804.9 million….the company [Netflix] has $1.3 billion in content fees payable over the next five years, up from $68.7 million three years earlier.”41 This can be seen in the graph on the below. The cost of streaming content by Netflix has risen dramatically since 2010 when it achieved its highest year-end stock price. One of the major challenges facing Netflix in the industry of streaming movies and TV shows is the animosity it is receiving from the corporations it must deal with to expand its streaming content. For example, “Warner Brothers and other studios want Netflix to accept the same deal Hollywood has with the cable companies in which they charge about $4 each time someone watches a new movie and then kick the studios 65% to 70% of the take.”42 If Netflix were to accept deals that are similar or the same as the ones Hollywood has with cable companies, it is clear that Netflix would not generate nearly as much in profit. This would lead to another increase in the subscription price and cause backlash from consumers similar to the instance in 2011.

41 Andy Fixmer, Cliff Edwards, and Ronald Grover, “Can Netflix Find Its Future By Abandoning the Past?,” Bloomberg Businessweek, September 26, 2011, pp. 29-30, Business Source Complete, via EBSCO. 42 Adam Satariano, Ari Levi, and Ronald Grover, “Honest Hollywood, Netflix Is Your Friend,” Businessweek, January 11, 2010, pp. 54-55, Business Source Complete, via EBSCO. 19

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Figure 4.3: Netflix Streaming Content Costs

Source: “Netflix Q4 Earning Estimates Report January 25, 2012,” Stock Exchange website, http://indonsia-stock- exchange.blogspot.com/2012/01/netflix-q4-earning-estimates-report.html, accessed March 2012.

Last year, Netflix subscribers clearly showed concern and dissatisfaction at the company’s attempt to establish Qwikster to separate streaming and its mail-in DVD services in order to raise prices. As a result, “Netflix lost 800,000 U.S. subscribers and it was the first time in years that Netflix’s U.S. customer base shrank instead of grew.”43 Netflix quickly issued an apology and brought the two services back together as it was prior to the change in hopes to recover from its decision. Although it was a “rough 2011 that saw the nonlaunch of Qwikster and an exodus of customers, the video-delivery service appears to be on the path to recovery as it added 610,000 subscribers during the fourth quarter of last year and is focused on the next phase of its evolution: original programming.”44 The online streaming industry is attractive because of its convenience and its prices. One of the essential and appealing aspects of having a Netflix membership is the low subscription fee that grants the consumer access to movie streaming in addition to a certain number of mail-in DVDs each month. Consumers may currently be making the transfer from purchasing DVDs and cable television to subscriptions with companies that offer video streaming like Netflix, but an increase in the subscription price of Netflix will lead to unhappy consumers and lower subscriptions.

Another challenge the online streaming industry has is that corporations must be able to acquire streaming rights to access content. Andy Forssell, senior vice president of Hulu,

43 Julianne Pepitone, “Netflix Loses 800,000 Subscribers,” CNNMoney, October 24, 2011, http://money.cnn.com/2011/10/24/technology/netflix_earnings/index.htm, accessed March 2012. 44 James Hibberd, “The Next Phase for Netflix,” Entertainment Weekly, March 2, 2012, p. 65, Business Source Complete, via EBSCO. 20

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stated that “rights are the core challenge in any market, and that's why we haven't moved more quickly; but it's been our conviction since day one that in the long term, if half the Hulu revenues don't come from outside the U.S., we haven't managed it effectively.”45 For example, Netflix shares dropped significantly when the news released that it wanted to separate its services and was unable to reach an agreement to maintain streaming rights with the cable channel Starz. This can be seen in the graph on the next page that tracked the stock value of Netflix from 2010 to 2012. It depicts the prices before and after Netflix was unable to come to a formal agreement with Starz and attempted to separate its services. There was major growth until 2011, then a major drop in the stock value. However, the stock value has risen greatly since its low point in November of last year. Additionally, one can see that the value of Netflix stock decreased in the period that it announced the separation of its mail- DVD service and Watch Instantly feature in August. The announcement of the failed deal between Netflix and Starz in September led to the plummeting of its stock value. The stock value of Netflix went from a high of $300 per share to below $150 per share in only a few months. Currently, “Watch Instantly features only 17,000 films and TV shows, compared with Netflix' 100,000 or so titles on DVD…and apart from the few Sony and Disney films Netflix got from the Starz deal, the selection is dated.”46 Beginning in March 2012, subscribers will no longer have access to recently released, enjoyable movies and TV shows from Starz such as Toy Story 3 and Spartacus. This means that the selection on Watch Instantly will be even more dated than it was before. The appeal of streaming movies and TV shows through Netflix will drop as an “analysis showed that 22 of the 100 currently most popular streaming titles on Netflix were from Starz.”47 Netflix has made agreements to expand its selection and is currently looking to finalize agreements with other corporation to access streaming rights, but the loss of Sony and Disney rights definitely hurts its Watch Instantly feature.

45 Lacey Rose, “Hulu Content Chief Andy Forsell,” Hollywood Reporter, January 27, 2012, pp. 28-30, Business Source Complete, via EBSCO. 46 Ibid. 47 Eric Savitz, “Netflix: Now What?,” Forbes, September 2, 2011, p. 16, Business Source Complete, via EBSCO. 21

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Figure 4.4: Netflix’s Stock Value from 2010-2012

Source: “Comcast Taking on Netflix,” Ozark News Journal website, http://www.ozarksnewsjournal.com/2012/02/comcast- taking-on-netflix, accessed March 2012

Another major challenge facing individual corporations in the streaming industry is the sharp increase in competition. Many have witnessed the substantial growth made by Netflix with its application of video streaming and have formulated their own programs that allow subscribers to stream movies and TV shows. There is “a long list of companies that hope to dethrone Netflix -- or at least survive amid its dominance -- by streaming premium TV and movie content: among them, iTunes, Amazon, Hulu, Best Buy's CinemaNow, Walmart's and bankrupt-but-still-operating Blockbuster.”48 The increase in competition from major corporations undoubtedly hurts Netflix. Tremendous growth from another competitor can be seen through Hulu as “revenues grew by 60% to $420 million and Hulu Plus, the company's service that lets users access thousands of TV shows for $8 per month, grew to 1.5 million subscribers from less than 300,000 a year ago.”49 It expects to continue impacting the streaming industry as “by the end of 2012, it expects subscriber revenue to account for half of Hulu's revenues (as opposed to money coming in from advertising).”50 The graph below depicts the growth in paid subscribers for Hulu. There has been a trend of increasing paid subscribers for Hulu, but it has yet to reach over 1.5 million. Hulu is one of Netflix’s competitors, but Netflix has a greater subscriber base with over 20 million subscribers. Also, one key feature that separates the two services is the commercial-free experience with

48 Paul Bond, Tim Appelo, and Carolyn Giardina, “How the Assault on Netflix Will Shake Out,” Hollywood Reporter, March 25, 2011, pp. 36-39, Business Source Complete, via EBSCO. 49 Dorothy Pomerantz, “Hulu Growing Despite Rocky 2011,” Forbes, January 12, 2012, p. 26, Business Source Complete, via EBSCO. 50 Ibid. 22

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Netflix. Hulu users are forced to watch commercials as Hulu gains much revenue through advertising. According to Douglas Kulper, Professor of Economics at the University of California, Santa Barbara, “there is still the possibility that Apple can beat the industry with technological innovations, effective management decisions, and its overall brand recognition.”51 In order for a company such as Netflix to survive, it must keep up with technology and make smart decisions. If it fails to effectively do so, it may suffer a fate similar to that of Blockbuster.

Figure 4.5: Hulu Plus Paid Subscribers

Source: “Hulu Revenue Soared to $420 Million in 2011,” Medacity website, http://www.medacity.com/3375/hulu-revenue- soared-to-420-million-in-2011, accessed March 2012.

There is not only the possibility of a great number of consumers choosing to subscribe to Netflix’s competition, but many consumers may cancel their subscriptions with Netflix and subscribe to one of its competitors. Cable television companies are also becoming active in the video streaming industry by making internet services available to those who pay for normal cable. For example, HBO is ramping up HBO GO, which puts its current programming lineup and past seasons onto PCs, smart phones and tablets, Starz says it's working on something similar, and Comcast offers 65,000 on-demand choices from its Xfinity TV website and apps combined.52 Instead of signing lucrative contracts to grant Netflix streaming rights to its material, cable companies are launching their own applications that feature their highly valued content. If a majority of corporations enter the online video streaming industry and prevent one another from accessing video content, it will be hard for a single corporation to dominate the industry.

51 Douglas Kulper, interview by Christopher Hong, Goleta, CA, March 13, 2012. 52 Harry McCracken, “Control Freaks,” Time, January 9, 2012, pp. 50-51, Business Source Complete, via EBSCO. 23

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Employment

24

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5. EMPLOYMENT

The rapid evolution of technology has caused several impacts on our standards of quality, efficiency, productivity, and innovation: especially in the Internet streaming industry. Consumers experience this evolution when buying some software programs, only to find a better or upgraded version shortly after. Meanwhile, the companies supplying these products face this fierce competition, often producing products that must be updated continuously to compete with the market. As it has been shown in the above sections, technology’s fast growth is particularly relevant to the online video streaming industry. In this environment, users expect their needs to be met as soon as possible. This means that the people these companies employ must respond to the instantaneous feedback the Internet supplies in a quick and responsive manner. These pressures have forced many in Silicon Valley, including Internet streaming companies, to reshape their focus on how they setup up and carry out business operations.53 This transformation can be realized by understanding the benefits and constraints that these businesses face with the growth of employment and competition in the industry. The following section will analyze the requirements necessary for success in attracting both employers and employees. This includes addressing the problems of a rigid management structure in this employment environment. As a solution, we hope to support the argument for deregulation of employment policies in this field of business. To represent the industry, this report will focus on some of the techniques employed by Netflix to help attract and maintain “talent density,” a necessary employment strategy to compete for prospective employees.54

Requirements for Employment:

While many aspects of the Internet streaming business are changing, education for the industry has predominantly relied on advances in software and personal computing. Therefore, a degree in computer engineering with a focus on computer science, programming, or software is still the best bet to enter into the job market.55 One of the most sought after and profitable positions in the field are software engineers. They have enjoyed much growth over the years, and still have opportunities for employment despite rumors of sending programming jobs overseas. These positions are projected to grow over 34% from

53 Michael Pettus, Josheph Mahoney, and Yasemin Y. Kor, “A Theory of Change in Turbulent Environments: The Sequencing of Dynamic Capabilities Following Industry Deregulation,” http://www.business.illinois.edu/working_papers/papers/07-0100.pdf, accessed February 2012. 54 Michelle Conlin, “Netflix: Recruiting and Retaining the Best Talent,” BusinessWeek Online, September 14, 2007, p. 7, Business Source Complete, via EBSCO. 55 “Software Engineering Overview,” Sloan Career Cornerstone Center, http://www.careercornerstone.org/pdf/tryengineering/softwareengieee.pdf, accessed February 2012. 25

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2008 to 2018.56 Along with this growth, 175,000 new jobs are created for software engineers and programmers alike.

As these statistics show, for six more years, a large number of software and computer engineers will be flowing into the market. This growth allows plenty of market opportunities for new businesses, where many prospective employees will make their starts. As workers begin to experience some of the trials and triumphs of working in the industry, they tune their skills to match specific interests and market demands. Software engineers generally find themselves in two categories: applications engineers and systems engineers.57 Applications engineers are in charge of designing, deploying, and maintaining the technical structure of an interface within a program or application. System engineers must manage the organization of a businesses network, and must work to maintain and expand the capabilities of the institutions as well as computer infrastructures and systems. Both jobs are equally necessary for running an online streaming company. For entry into salaried positions at many of the more successful streaming corporations, around 15 years of experience is necessary.58 In this field, experience will shape not only their paths within the industry, but also help to qualify them amongst their fellow peers.59

Employment Environment in the Streaming Industry:

One benefit of the growth and competition in streaming industries is that it has allowed successful companies the freedom to choose from a pool of highly achieving prospective employees. Silicon Valley is a highly competitive market for the top professionals and masterminds of the computer and software engineering crafts. As in other industries, it is not unlikely to discover that Human Resource departments are looking into the recruitment of rival company employees. Major players in the online streaming industry such as Hulu, YouTube, and Netflix have all searched for a competitive edge by incorporating some of the strengths and ideas that members of other organizations have to offer.60 Thus a successful company will go to great expense to make their workplace ‘culture’ as appealing as possible for other intellectuals. This not only makes the recruiting process easier, but has also led to the creation of more flexible and enjoyable benefits and programs for employees. In general, this tends to mean more vacation time, less structured time-management, and higher salaries. Of course, the stipulation is that one must be able to perform at a higher level than most of his or her peers. Many companies have opted for this business model. While in the past,

56 U.S. Department of Labor, May 2010 statistics, http://www.dol.gov/dol/topic/statistics/index.htm, accessed February 2012. 57 “Software Engineering Overview,” Sloan Career Cornerstone Center, http://www.careercornerstone.org/pdf/tryengineering/softwareengieee.pdf, accessed February 2012. 58 “Netflix Culture,” Internal PowerPoint document, http://www.slideshare.net/reed2001/culture-1798664, accessed February 2012. 59 Ibid. 60 Danielle Sacks, “Blown Away,” Fast Company, Issue 152, February 2012, p58-104. 26

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companies were wary of spending a dollar more than necessary to fill a position in the company; many have now opted to invest heavily in attracting and retaining the best people in the industry.61 A primary example of this technique is demonstrated in the business model of Netflix.

Netflix: An Example of a New Approach

Netflix was founded because Reed Hastings (future CEO of Netflix) saw a flaw in the movie rental operation after paying a particularly large late fee. Like the gym he was a member of, he decided it was better to pay a monthly membership for the ability to use any equipment (or movie) as long as you want.62 This revolutionary idea sparked the rise of one of the first movie streaming websites. As Netflix looks forward to the challenges it faces in the near future, it has not forgotten its roots, and is attempting to outshine its competitors by promoting another new approach to its business model, nicknamed “tough love.” This model includes a fresh perspective on time and employee management, one that is deregulated with an emphasis on individual freedom.63 This environment is meant to allow high-producing employees the breathing room to dictate their own working patterns. As evidence will support, this freedom allows employees to take control of their work, and thus feel more fulfilled when it is completed. However, this leniency comes with a tough approach towards replacing incompetent employees and finding better talent. Thus, the freedoms that these workers enjoy must come with an understanding of their responsibility to succeed. They must meet and exceed their own expectations of productivity to stay competitive as an employee in the job market. Therefore, Netflix takes special measures in selecting those that they choose to employ. We will provide research supporting the claim that techniques of companies in the streaming industry, like Netflix, are beneficial to workplace productivity, psychology and innovation in the field. Internal documents leaked from Netflix will later dictate the specific qualities that are indicative of the types of people this work culture fosters and attracts.64

Traditional big business models tend to focus on a rigid hierarchical structure of management and policies. These types of business models do not allow for the sufficient amount of flexibility that many online streaming companies require. As such, the pace of the streaming industry has forced many companies to strip down their employment structures. These companies face shorter deadlines, increasing the need for fast yet informed decisions.65 Traditional corporations rely on a web of managerial and executive protocols to evaluate

61 Michelle Conlin, “Netflix: Recruiting and Retaining the Best Talent,” BusinessWeek Online, September 14, 2007, page 7. 62 Robert Grossman, “Tough Love at Netflix,” HRMagazine, April 2010, Vol. 55, issue 4, pages 36-41. 63 Ibid. 64 “Netflix Business Opportunity,” Internal PowerPoint document, http://www.slideshare.net/reed2001/culture- 1798664, accessed February 2012. 65 Larry Hirschhorn, Thomas Gilmore, “The Psychodynamics of a Cultural Change: Learnings From a Factory,” Human Resource Management, vol. 28, issue 2, Summer 2010. 27

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

productivity. These protocols waste valuable time as the train of information slowly makes its way up and down the corporate ladder. Once a decision is made, changes can only be carried out through this same system. Managers must now communicate, authorize, and train their staff to obey these drafted procedures. The primary followers of these new procedures, the employees, have largely been left out of the decision process. This disenfranchises employees from participating in the creative processes that they should help conduct. Now, we can see how the hierarchy of the office life may impair the adaptation necessary to compete in a rapidly evolving market.66

The bankruptcy of Blockbuster is a clear example of the failure of a traditional business model due to the expansion of the online streaming industry. Blockbuster was slow in adapting to the changes in consumer demands. Consumers are currently trending towards user convenience. The rigid structure of physical video rental stores was impossible to adjust to the industry’s changes in a timely manner67. Figure 4.1 below illustrates Netflix’s market takeover of video rentals. We are able to visualize how the changes in market share are almost symmetrical and how they must have occurred due to Netflix’s quick response to the consumer desires that Blockbuster left unattended:68

Figure 5.1: Netflix vs. Blockbuster

Source: Tanner Ringerud, “The Simple Explanation Behind Blockbuster’s Bankruptcy,” BuzzFeed, http://www.buzzfeed.com/awesomer/the-simple-explanation-behind-blockbusters-bankru, accessed February 2012

66 Ibid. 67 Megan O’Neill, “How Netflix Bankrupted and Destroyed Blockbuster,” Business Insider, March 1, 2011, http://articles.businessinsider.com/2011-03-01/tech/30045214_1_netflix-blockbuster-rentals-by-mail, accessed February 2012. 68 Ibid. 28

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

After Netflix introduced their Internet streaming, Blockbuster finally started to make decisions in line with the rest of the industry, including the introduction of its own streaming service as discussed in earlier sections. This had happened along with decisions to close 140 stores and lay off over 1,400 employees by June 18th, 2012 in Canada alone. Blockbuster announced their bankruptcy in 2010 and it was reported this February that plans to close another 500 stores in America were still expected69. As they continue to sell off their assets, it is evident that the quick changes in consumer demand for online streaming entertainment caused the demise of Blockbuster. This lends more evidence to the claim that traditionally structured corporations are struggling to solve the challenges faced with the instantaneous environment of online streaming industries.

To combat these problems, deregulation has slowly permeated throughout the United States streaming industries.70 Like with Netflix, this move involves getting rid of many of the layers of policy and management that have dominated the American workplace.71 This means that change can be carried out in a more direct manner and that all employees must be held individually accountable for making important decisions. Thus, the responsibility to produce revenue is spread more equally across all members of an organization, and thus much more time and investment is being put into finding the types of people that can lead themselves. Without managers, an employer must make sure that the person he or she is hiring is self- sufficient: taking care of his or her own motivation, awareness, discipline, and improvement. Not only has this helped reduce excess baggage in a company’s operations, but the psychodynamics of the workplace have also changed for the better.

Psychodynamics of Employment in the Online Streaming Industry

Traditionally, managers have been relied on to command others to carry out the actions of daily business. Difficulties arise because a delicate structure of authority must be assembled so that those in charge are qualified to lead, and those who follow orders are willing to do so. This is a major reason why office life has sometimes been portrayed as a stressful and dramatic environment in pop culture, as in the TV show The Office72. Some of these internal problems businesses face stem from the conflicts arising from conscious and unconscious practices of subordination within the institution. These psychological stresses have proven to lower productivity, prompting research into the cause and prevention of workplace stress. This research has inspired companies like Netflix to approach employment differently, and supports the positive results they have experienced

69 Mark Heschmeyer, “Blockbuster closing another 500 stores,” CoStar Group, February 2012. 70 Larry Hirschhorn, Thomas Gilmore, “The Psychodynamics of a Cultural Change: Learnings From a Factory,” Human Resource Management, vol. 28, issue 2 (Summer 2010) 71 Michael Pettus, Josheph Mahoney, Yasemin Y. Kor, “A Theory of Change in Turbulent Environments: The Sequencing of Dynamic Capabilities Following Industry Deregulation,” http://www.business.illinois.edu/working_papers/papers/07-0100.pdf, accessed February 2012. 72 Ibid. 29

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Our phone interview with graduate student Diane Leonard, studying Psychology at the University of California: Los Angeles provides insight to specific evidence and case studies that support Netflix’s moves toward deregulation. She explained how certain reward systems work to motivate participants in a workplace setting.73 One case illustrated an experiment where a group of individuals was paid $20 to create and distribute a survey. Another group was given the same task, but was offered either a very small amount or no monetary reward at all. Afterwards, each group of participants was asked how much they enjoyed the experiment, but the results where peculiar. All of the people offered $20 as a reward graded their enjoyment as a five or six on a scale of one to ten. Interestingly though, the individuals who were offered little or no money enjoyed the experiment more, having averages of eight to nine on the same survey. This is because the individuals with a reward attributed their motivation with a desire to satisfy the requirements put on them by the proctor, or manager. They felt obligated to satisfy somebody else’s standards, and therefore felt disconnected from the task. On the other hand, individuals with little or no reward attributed their increased motivation to their inner desires to produce quality work. 74 Since no reward was expected, these individuals focused on producing a product that they were proud of. Participants were psychologically more satisfied and also more productive. She explained how this is good evidence for the success of business models that Netflix and other streaming companies employ. By deregulating, employees experience this same boost in productivity and enjoyment. They are not as focused on following procedures necessary to obtain a paycheck, rather they focus on satisfying their own goals, and thus their salary becomes a consequence of what they have produced. This is the type of employee that companies like Netflix hope to attract.

Netflix Culture and Employee Values

As a part of a press release to the public, internal documents circulating throughout the Netflix offices made an appearance on public servers. This presentation promoted individuals that where motivated for the same purposes as those in the psychology study above. The nine values described in the presentation include: judgment, curiosity, passion, communication, innovation, honesty, impact, courage, and selflessness. These are qualities that Netflix employees have voted on, and they depict the most important personal traits of the people they want to interact with. This is important considering that Netflix prides itself on its close- knit community and its ability to retain employees for long periods of time.

In fact, the six beginning Netflix executives, all still remain with the company. Netflix also has a low rate of voluntary employee turnover. While this is good news to support evidence that their business model attracts employees, this does not mean that the job turnover is low.

73 Diane Leonard. Psychology graduate student at the University of California: Los Angeles. Phone Interview conducted March 12, 2012. 74 Ibid. 30

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

In fact, because of the heightened responsibility that each individual has, underperformance is not tolerated. While many businesses may reward average performance with an average raise or bonus, Patty McCord, chief talent officer of Netflix since 1998, says, “We reward adequate performance with a generous severance package.”75 This means that their ability to recruit the top talent in the industry means a current employee’s jobs is only as secure as his reputation. Employees are competing with the job market to prove themselves as the best in the business. Even though Netflix may not have the managers necessary to evaluate an exact numerical value of an employee’s productivity, they have plenty of prospective candidates that compete for positions. With over 1,644 employees and around 500 salaried professionals, there are plenty of opportunities for a more qualified prospect to be of use. Netflix does not, however, follow its competitors by hiring talent fresh out of the universities. Netflix depends on veterans from the industry with at least 15 years in the profession.76 This has helped to ensure their talent density. Being surrounded by equally accomplished coworkers makes the environment playfully competitive.

Peer pressure is an asset that many in Netflix are calling a self-regulatory system for problems concerning productivity, excess vacation time, and expenses. This is because some policies in Netflix allow freedoms that can be abused. For example is no set policy for vacation time, except that an excess of 30 days must be reported to the administration.77 Also, entertainment expenses are not limited. Since they enjoy virtually no limits to vacation time and travel expense, workers must be trusted to “act within the best interests of the company.” This means that much more effort must be put into the hiring and recruiting of individuals who are “rare responsible people.” This includes self-motivation, self-awareness, self-discipline, and self-improvement. Anybody that lacks these qualities is not congruent with the rest of the employees. If each person in the company requires a hefty responsibility, to tolerate one person’s inabilities would be to undermine the importance of the whole system. Therefore, every person in the company must exude the same level of professionalism, maturity, and excellence. This ensures that people will be working with each other on very similar levels and with very distinct personalities.

Unfortunately a consequence of this ‘tough love’ approach to business is the high involuntary job turnover. Netflix has a job turnover rate of 20% despite its good reputation.78 According to an interview conducted with Bach Ha, this is a consequence of the attempts that Netflix has put forth to establish what they call “Talent density.” When asked about the culture of the workplace, Bach admitted that they had done a good job to establish an amicable environment.79 While it was easy to enjoy work life, he also described the circumstances that

75 Ibid. 76 Robert Grossman, “Tough Love at Netflix,” HRMagazine (April 2010), Vol. 55, issue 4, pages 36-41. 77 Ibid. 78 Ibid. 79 Bach Ha, Former employee at Netflix, Phone interview conducted March 10, 2012. 31

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

led to him being laid off. Over time while the technology for distributing DVD’s became more advanced, the need to keep him hired faded. At a certain point, Netflix made the decision to switch to a fully automated system to increase productivity, and as a consequence laid off many workers. This ended Bach’s job at Netflix, but exemplified Netflix’s willingness to alter their business structure to accommodate changes in technology and consumer demands.80 This flexibility is necessary to adapt to developments within the online streaming industry and to succeed in the years ahead.

80 Ibid. 32

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Forecast Of Major Issues

33

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

6. FORECAST OF THE MAJOR ISSUES Online streaming of television and movies is one of the major industries of the future. Due to the overall convenience, availability, increasing usage, and subscription rates associated with video streaming, it is safe to say that online streaming will be one of the major entertainment industry sectors in the coming years. However, several challenges and issues will arise as the complex nature of this industry is revealed. The Internet is a unique realm that improves as the world develops and technology advances. This is going to be an exciting industry to be a part of for many reasons. Below is a graph showing how the growth of online video streaming (in any capacity, in major European nations) is increasing every single year and shows no signs of slowing down. It is evident that the online streaming industry is continuing to grow rapidly and this rate of growth and consumption is perhaps the industry’s greatest opportunity going forward.

Figure 6.1: Growth of Online Video by Total Unique Viewers

Source: Eglantine Dever, “What is the Top European Country in Online Video Usage?” http://blog.hi- media.com/category/industry-news/online-usage-and-population/ Accessed February 2012.

Subscription Services

NBC Universal and NewsCorp , the owner of Fox Network, originally created Hulu as a defense against Internet piracy.81 Hulu then offered its subscription service to supplement the free, advertising based portion of the site. For $8 a month, subscribers to Hulu Plus gain

81 Irene E. McDermott, “Online Video Brings Out our Inner Network Executive”, EventDV, p. 7-11 (December 2011). Accessed February 2012 by EBSCO. 34

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

unlimited access to television season programming, as well as movie options, and the ability to stream on certain devices like iPhones or iPads.82 Due to the ease of accessibility, content availability, and the possibility of losing profits from cable and subscription fees, Fox Network decided against granting companies like Netflix access to their content.

The implications of battles like this are that more consumers will part way with cable and television subscriptions and get the immense amount of content from the Internet [interview/survey research of college students who watch shows online versus on television, statistics on those who pay for cable]. So the fact that more subscription choices are being offered with greater content access than the advertising sites means that this may be the new way to access video content. Subscription services also have the added convenience of less advertising and access to greater amounts of video content. Advertising websites are often found to be simple annoyances. Advertising will not die out though because of its importance to creating consumer awareness. A Dynamic Logic Market Norms study showed that online video advertisements were better for communication and persuasion than other online formats83

How Theaters Will Put Up A Fight

One of the biggest fears for the movie theater chain is that the comfort and convenience of home movie viewing will drive consumers away from a potentially expensive night at the theatre. There are certain technologies that may allow movies to stay competitive and keep people in the theaters.

Movie theaters and filmmakers have been investing more in 3D technology. James Marsh describes how companies like RealD, provide exhibitors with 3D technology and take a cut of the premium that is being paid by the moviegoer. However, James Marsh, an entertainment research analyst, notes “3D sentiment has been a real rollercoaster… people have either been very excited about or very negative about.”84 The problem is that if audiences have seen similar movies in a 2-D, they may decide it is not necessary to pay the extra fee to view it in 3-D, and would rather pay a 2-D cost or wait until they can view it online. The offer of “experience” is one of the only real advantages movie theaters have over the online streaming industry.

82 Ibid. 83 Nick Huber, “Watch Closer”, New Media Age Special, (May 2009) p. 29. Accessed February 2012 by EBSCO. 84 Interview with James Marsh, “A move toward Higher Quality Experience in Entertainment”, Wall Street Transcript, (October 2011), Accessed February 2012 by EBSCO. 35

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Figure 6.2: Online Video Streaming has deterred me from going to the movie theatre

Source: Self-conducted survey data, “Online Video Streaming Survey”, March 11th, 2012.

The survey we conducted, although on a small scale, did have some positive news for the movie theater industry. Every respondent to our survey (57 total) fell into the 18-29 age range, an important demographic for any entertainment industry sector. As shown in Figure 6.2, based on our survey question: “Online video streaming has deterred me from going to the movie theaters”, 29.8% strongly disagreed with this statement. Another 14.0% slightly disagreed with the statement, while 22.8% of respondents neither agreed nor disagreed, meaning that the convenience factor of online video streaming had not deterred the majority of our respondents from wanting to go out to the movie theater. This data shows that, for now, movie theaters have not completely lost their appeal with younger movie-goers.

Internets Ability to Reach Global Audiences: Pros and Cons

The Internet is a worldwide phenomenon. It has the unique ability to position itself in any marketplace almost instantaneously. As long as a country or region has the correct infrastructure in place, residents can access worldwide content from their own computers…up to a certain point.

Right now, services like Hulu only offer their content to places where they have secured content licensing agreements, in order to clear the rights, with the companies whose shows or movies they offer.85 Hulu only offers its content to the United States and Japan as of right now.

85 “International (Outside USA)” http://www.hulu.com/support/article/171122. 36

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Of course, even though the entire world may seem to be available to these major online streaming companies, there are overseas competitors as well. Lovefilm works on a model similar to Netflix’s in Europe.86 Also, in many overseas markets, there are lower broadband support networks and data transfer speeds, meaning offering services such as Netflix in those areas would be a vastly reduced streaming quality, and could possibly turn off potential consumers to the service’s poor quality.87 Companies have room to maneuver for potential markets, and with the rise of subscription and fee-based services, this could move even more people away from their regularly scheduled television programming and into online services.

The other problem is market saturation. Since more content providers are entering the online streaming industry, it decreases the time that is spent on any single website. Several online streaming sites such as Metacafe or Dailymotion faced yearly declines in minutes spent on websites, even though unique users went up (this was even before the advent of Hulu.)88

Challenges of Network Neutrality

Network neutrality is the situation where content providers pay only their own hosting provider, while the hosting provider can then make that content available to a global Internet audience. In layman’s terms, content is provided globally through a single connection.89 The concern is that internet access providers (IAPs) such as Comcast could enter into strategic agreements with larger companies (like Netflix) and offer them better video and streaming quality than a smaller website, thus filtering access and content to the websites that can enter into these agreements with IAPs.90 Currently the FCC and even European legislation operates under a “no unreasonable discrimination” provision. Discrimination is only possible in private Internet providers, not public ones, and network neutrality is threatened because there is no concrete definition of what parts of the Internet are private or public.91

The implications for companies like Netflix or Hulu when it comes to network neutrality are complex. On one hand, it seems that if these companies can access greater quality of service (QOS) from IAPs, then they would be able to put their content at the forefront by getting better connection speeds, higher buffering rates, etc. This would drive consumers in their direction and away from startup streaming companies. Netflix already is responsible for 20% of Internet downstream activity in the United States by some estimates.92 If these IAPs are

86 Trefis Team, “Netflix May be A Great Short Due to Market Saturation,” Forbes.com, (January 2011). 87 Ibid. 88 Nick Huber, “Watch Closer”, New Media Age Special, (May 2009) p. 29. Accessed February 2012 by Business Source Complete. 89 Daniel L Brenner and Winston Maxwell, “Network Neutrality and the Netflix Dispute: Upcoming Challenges for Content Providers in Europe and the United States”, Intellectual Property and Technology Law Journal, (March 2011). Accessed February 2012 by Business Source Complete. 90 Ibid. 91 Ibid. 92 Ibid. 37

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

able to enter into QOS fee agreements with larger companies, than smaller ones would have to rely on the best-effort Internet streaming capabilities, harming the perceived quality of their product. This is an interesting issue that on the surface seems to be more about freedom of information and increased connectivity, but based on the way the governments of the world handle this issue, could have striking business implications in the years to come.

Physical Media Usage

It is clear that many online streaming companies, or companies that have offered physical DVD usage in the past, are beginning to make physical copies a thing of the past. The Netflix android app does not even offer access to the DVD rental portion of the website, only streaming content.93 In fact, most of the companies we profile in this industry report, such as Hulu, HBO GO, Amazon Prime, and the myriad of illegal sites where people can find movies and television sites online, do not have a physical media component to their business designs.

Original Content

Since Netflix and Hulu are going to face rising costs from the movie studios and television networks to show their content, they have recently created a new aspect to their business models, original programming. This follows the general model for HBO, which at first was a cable subscription showing movies that had already gone through theater runs. Eventually, HBO branched out with series such as The Sopranos or Sex and the City, and are now arguably known more for their original programming than the movies they regularly show.

Hulu debuted Battleground, a comedy-drama about political campaigners, to mixed reviews. Hulu senior vice president of content, Andy Forsell, hopes to extend this program in the next few years and use the traffic Hulu gets as a sort of self-sustaining marketing, driving down production costs.94 Also, Forsell notes Hulu and Netflix are not restrained by hours and schedules, so they can debut as much content as they want, when they want.95 Netflix has ambitions, according to CEO Reed Hastings, to create up to 40% original content, putting it as a rival more on par with HBO and Starz rather than traditional television cable channels.96

Youtube is also working on a deal to provide original content from professionals, rather than the simple user-uploaded original content that consumers are used to viewing on that website. Google, which owns Youtube, has created deals with studios such as Lionsgate as well as deals with individual artists like Jay-Z to provide original content through various “channels”

93 Irene E. McDermott, “Online Video Brings Out our Inner Network Executive”, EventDV, p. 7-11 (December 2011). Accessed February 2012 by EBSCO. 94 Samantha Grossman, “Hulu and Netflix Begin Forays into Original Programming”, techland.time.com, (February 15, 2012), Accessed February 2012. 95 Ibid. 96 Jeff Rosz, “Netflix Thinks Original Content is Future”, mediamarketjournal.com, (February 2012). 38

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

on its website, and the channels are expected to launch this year, in 201297. They hope to generate around 25 hours of original programming per day, positioning themselves as yet another challenger to the traditional cable television model. 98

The implications of this are stunning. First of all, it makes Netflix a competitor with all types of media sectors. Going to the theaters, premium cable offerings, and regular network shows would all be facing the supreme availability of Netflix content and their online model. If Netflix can shift more and more content online, it is only a matter of time until all content will be available online. All shows debut when the consumer wants, not on a weekly schedule that may inconvenience some people in today’s fast-paced age of multiple consumer options and selections. Youtube would also be relying on advertisements to recoup expenses of nearly $100 million so far, and thus would not be negatively affecting the site’s convenience and ease of use, as many users are used to the advertisements that have already begun to play before some popular videos.

Consumer Perceptions

The online video streaming market is one that is going to have to adapt to whatever direction consumers want to take it. Whether people decide they value original programming, freedom of choice, higher quality streaming, or more variation in television and movies, the online streaming companies will have to shape their companies that way. Fortunately, they deal in the online medium, so technology can allow rapid changes and advances to take place in almost perfectly seamless transitions.

97 Sharon Waxman, “Youtube Unveils Original Content Channels in Challenge to TV”, www.reuters.com (October 2011). 98 Ibid. 39

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

Figure 6.3: What aspect of the online television/movie streaming experience would you MOST like to see improved in the future?

Source: Self-conducted Survey, “Online Video Streaming Survey”, March 11th, 2012

Based on a survey conducted by our group, in Figure 6.3, we see that out of 57 respondents, cheaper subscription rates and wider variety of content were cited by 47 people (84%) as what they would most like to see improved by online streaming companies.

Figure 6.4: For the answers below, check the box next to the online video streaming sites that you have used in the past month.

Source: Self-conducted Survey, “Online Video Streaming Survey”, March 11th, 2012. 40

Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

In terms of the hegemony that we have referred to by some of the major streaming companies, our survey reflects this perception of dominance by a few major companies with raw data. As shown in Figure 6.4, 50% of respondents used Hulu within the last month, while 81.5% of respondents also reported using Netflix within the last month. Even Youtube’s relatively newer movie rental and live streaming services were accessed by 20.4% of respondents in the last month. Less ubiquitous sites like HBO Go and Amazon Prime only received 7.4% and 3.7% usage rate in the last month, respectively.

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix Conclusion

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

7. CONCLUSION

The online video streaming industry is changing the way that people interact with their entertainment. Due to the convenience of the medium, people attitudes and perceptions towards accessing entertainment are evolving. It used to be that everyone watched the same three television channels, with very few programs, and if you missed your show, then your chances were gone. People planned their daily lives around their entertainment. Now, watching television and movies are malleable events that can be planned for at an individual’s own discretion. Thanks to the ability of the internet to be accessed from a myriad of devices, people can take their entertainment with them on the go. Companies that provide this entertainment, like Netflix, Hulu, or YouTube, are trying their hardest to remain at the forefront of a complex industry with several unique trends and challenges.

The majority of peak bandwidth use goes to sites like Netflix. People are able to view television programs whenever they want to, and suffer relatively minor inconveniences like wireless network outages or poor streaming quality. As technology improves and high speed internet becomes a universal commodity, these irritating by-products of online streaming will eventually dissipate. The traditional model of physical media usage like movie theaters or Blockbuster, are either adapting to the online experience, or face the perils of being converted into relics by the steadily advancing tide of the online streaming revolution. Of course, because the Internet and its capabilities are so unlike many other industries, which are limited by the physical realities they exist in, things can change relatively instantaneously. The rise of online streaming has been exponential for the past few years as this report has seen, which means its continued relevance will require changes in business models, as technology changes by leaps and bounds every year.

Netflix and Hulu may be forced to move to original programming, making them competitors with premium cable channels with HBO rather than threats to the regular cable networks. The rise of subscription prices are always a concern to consumers, but the fact remains that companies can still host television shows and movies on sites and generate revenue from online advertising, which has the unique ability to gather information on the individual consumer and tailor advertisements to products that coincide with their own interests. Network neutrality may also have an effect on the freedom of information and the ability of larger companies like Netflix to maintain power, so these legal challenges will be interesting and the governments of the world may have a unique hand in these changing environments. To handle such a monumental task as navigating a company dealing in streaming online media, we have seen you need top quality professionals at the helm.

Talent density, a buzzword that Netflix has made part of their employment mantra, means hiring experienced individuals who can plan and structure the website, rather than be prodigiously talented coders. Online streaming websites need innovative thinkers, whether it

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Analysis of the Online Video Streaming Industry with an Emphasis on Netflix

is in the management aspect to deal with all of the aforementioned trends and issues, or software engineers who can bring the best product available to the consumer. The advent of online streaming and the growth in the industry means more complex work for people with computer engineering degrees. It also signals a change in the demanding, monotonous physical labor that was tied with working in the warehouses of these companies that relied on physical DVD rentals.

As you can see, this industry always has one eye looking towards the future, so it is going to be incredibly exciting to see the possibilities that comes with the expansiveness of the internet and online video streaming. Entertainment has seen an explosion in variation and availability of content, and there are now channels and television shows out there that can cater to any interest. With the online streaming industry, it’s about bringing the people what they want. The online streaming industry is leading the charge in the entertainment revolution.

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