Contra Lefsetz on Netflix

"They could go back to buying DVDs, but that's still a bad deal compared to Netflix."

 ~Bob Lefsetz

You go over to a buddy's house. he tells you, "Let's watch [X title]." Do you care if it's rented or "bought"? Of course not.  Does the fact that its rented give you a better "experience"?  Of course not. If you owned that video for 24 hours and sold it back to a completely fluid used market, would it make a difference to you?  Of course not. A long as that video was there when you wanted to watch it.  

Transfer of ownership via cloud immobilization is easy to do.  It's what they do in the financial world with stocks and digital banking. It just hasn't been tried.  Because influential critics like Lefsetz think "renting" and "streaming" are something magic.  The magic, instead, is in the way the Internet allows us to account for which users have rights to content, and which users don't.

Lefsetz is making a fundamental error. He is confusing modes of delivery with types of ownership.  A user doesn't care whether a video is owned or rented.  He just cares, "Am I watching this when I want it?".  When a record store was on every corner of every city block, did people care that it was "bought" rather than "rented"?  Of course not.  It was called "access".  You bought a loaf of bread.  You bought a Beatles record next door to the bakery.  You were listening to the music then and there, when it was hot.  That's all you cared about.

You can own a DVD and stream it and then sell it back to the pool if you think you'll never want to watch it again.  But if you want to watch it again, it's better to own it.  It's your choice.  But: do you think the Internet is not up to dealing with a market where everybody owns a DVD for a length of time determined by them and then resells it by a click of a button? Or lends it to a friend?  Or lends it to a stranger?   Have you not heard of "cloud computing"?   When you put stuff up in a cloud it is immobilized.  It's one-for-one.  There is no need to "rent".  Ownership changes hands within an instant.

Rental itself was born in a physical era.  Yes, we can accommodate rental on a digital exchange basis, but it is not a magical talisman.  In order to rent a copy to its customers, Netflix owns copies.  Netflix is simply a library, no different from the one in your neighborhood.  It buys stuff.  It lends it out.  Streaming is just one of several ways to distribute the content to the borrower.  The point is that we need to account for each copy and keep track of who is a Verified Accessor of that copy so that the person who is the Verified Accessor can have his or her access switched on when they go to the cloud to stream it.  When the Netflix movie is returned to Netflix then Netflix is the verified accessor until the next time it is rented out.

All of this is possible through an Exchange.  We have one patent-pending, and an embodiment in beta-test right now.  It's called the Digital Content Exchange. Once the Digital Content Exchange is up and running, it will have a log of everyone who can watch The Kings Speech, from the cloud, at that moment.  That "right to watch" could be by virtue of ownership (digital download or physically-verified DVD), renting (Netflix) or borrowing (New York Public Library).  If you own you can also download to as many devices as you like.  If you are renting or borrowing, you can only stream (the Library and Netflix don't want you making copies of stuff you borrow, and the DCE will abide that rule). It's that simple.

And now, Lefsetz:

For those who say people will never rent music, remember people rented videotapes, bought DVDs, rented DVDs and now stream movies. Don't tell me what the people want, they don't know. Furthermore, what made streaming so appealing was two breakthroughs, Netflix-compatibility in television hardware and the iPad. Yes, imagine if the music industry had enabled tech innovation instead of thwarting it, maybe it would have been prepared for the future.

In case you've been under a rock, yesterday Netflix split streaming from renting, instead of one low price you got a whopping increase if you still wanted both. People are complaining, but as stated above, what is their alternative? They could go back to buying DVDs, but that's still a bad deal compared to Netflix. As for renting, where you gonna do it? The video shop has evaporated and yes, we've got coin-operated rental machines, but inventory is limited and you've got to leave your house.

So I'm laughing. It's the cheapskates revolting.

But they've got an alternative, streaming.

 

Unfortunately, the movie business is leading.

The music business could have killed the CD, could have driven people to subscription, but afraid of the future and wedded to the past it refused to do so to its detriment. We'll see what happens now.