Sunday, December 19, 2010

Real Time Failure and Success

As social media begins to dominate the Internet, it's more critical than ever that your first audience truly loves what you're doing.

Social media has been a part of the media landscape for about 5 years, and it's impact is already being felt in a big way.  As we approach the beginning of 2011, Facebook's Mark Zuckerberg and his team have built a cyber-city of over a half billion users.  There are probably around 200 million Twitter users and LinkedIn is close to 100 million.  These are big numbers in any medium.  But what's more important than the numbers is the trend that they represent.  People don't have ten times the number of friends that they did before 2005, but for many people the nature of communication within those relationships has changed a lot.  And the implications for business are enormous.

Consumers are now relying more heavily than ever on the opinions of their friends and other people whom they perceive as similar to themselves.  Communication within online communities -- groups of people with common interests or other similarities who interact through social networking -- now often has more impact on buying decisions than paid advertising or any other factor.  You can spend a lot of money to get your product noticed, but if the "buzz" is negative, that attention will not turn into sales.

This trend is expanding at an enormous rate as social media evolves, and it is extremely relevant to the entertainment business.  It used to be that a well-advertised film with a decent cast could expect some reasonable opening weekend numbers.  If audiences didn't like it, they might start telling their friends around the water cooler on Monday morning and a negative response would start to develop.  But the distributor might be able to adjust the advertising to try to find a different audience and maintain some momentum into the second weekend so that the numbers wouldn't fall too fast.

Now, if audience members don't like a film, they are telling their friends about it while they are still in the theater.  If the Friday night crowd hates it, the Saturday crowd never even shows up.  Films die in a matter of hours rather than weeks.  There's no time to adjust or respond.  The verdict is rendered and the sentence is carried out before the weekend box office numbers are even published.

By the same token, if audiences love something enough to tell their friends, it can create tremendous positive momentum.  If people are so excited by a film that they start tweeting or posting to Facebook, unexpected crowds of people will start showing up.  And those audiences will already be positively disposed towards the film and thus much more likely to enjoy it and tell their friends how good it is, and so on and so forth.

And the same trends are showing up in television and other media as well.  Content of all sorts is having its fate decided very quickly.  Success or failure can be decided by the time the first episode is over.  If a negative buzz develops, it may very well be too quick and too powerful to overcome.  But if a positive buzz develops, the rise in popularity can occur literally overnight.

Obviously, this means it's more important than ever, in this new social media environment, to make your films and programs great.  But the less obvious lesson is to be sure you are speaking to an audience that will respond passionately and positively.  From the moment you start your project, know for whom you are making it, and create and market the project with that audience in mind.

It is critical that the first audience for your work responds positively.  You might make a very good film or program, but if you end up with the wrong audience, and they tell their friends they didn't like it, your project may die a quick death.  There are not a lot of second chances in an environment dominated by real time reactions.

Saturday, December 4, 2010

Real Victories Are Won In The Marketplace, Not In The Courtroom

This may sound odd coming from a lawyer, but courtroom victories often have limited value.  In fact, winning legal battles can sometimes do more harm than good.

 In 1999, TiVo invented the DVR, and registered patents to protect its novel ideas.  Initially, TiVo was so successful in bringing its product to market, that the word "TiVo" actually became a verb (a good indicator of massive market acceptance).  If someone said, "I'm going to TiVo that program," you knew that they were digitally recording it so they could watch it later.  By January of 2007, TiVo had about 4.5 million subscribers -- millions of households that had TiVo boxes attached to their television sets, ready to receive all types of digital programming.

Now, only 4 years later, Apple and Sony and Google and Hulu and Roku and Netflix and several other companies are all fighting to be the leader in bringing digital programming to the world's TV's.  Certainly, TiVo is still in that race, but it is struggling to keep up.  TiVo was several years ahead of everyone else and now, when the stakes are becoming meaningful, TiVo is trying to remain relevant.  How did it lose such a huge head start?  

In its most recent quarter, TiVo's revenues are down to $41.3 million, with a net loss of $20.6 million.  It now has about 2.2 million subscribers -- less than half of what it had only 4 years ago and the number is still falling.  In the meantime, Netflix (which started around the same time as TiVo) has close to 17 million subscribers and continues to grow. What happened?

TiVo apparently decided early on that its patents were its most valuable asset - more valuable than a direct relationship with consumers.  This was a critical strategic decision that probably made perfect sense at the time.  TiVo recognized that cable and satellite companies were in the best position to sell or rent DVR's to consumers, so it began licensing its intellectual property to those companies.  But in 2001, Echostar decided it wasn't going to pay a royalty to TiVo.  In January of 2004, TiVo sued Echostar (and its now-former affiliate, Dish Network), and almost 7 years later, the litigation continues.  

And the most ironic (or perhaps saddest) part is that TiVo is winning!   TiVo has prevailed at virtually every stage of the litigation, but Echostar refuses to give up.  Instead, Echostar appeals and raises new issues and makes minor modifications and continues to fight, while all the while the clock is ticking on TiVo's patent rights.  (Echostar did pay TiVo about $100 million at one point in the litigation, but that money is being depleted by operating losses.  With that said, TiVo is not in financial trouble; it has plenty of cash for the time being.)

And while TiVo has enjoyed a lot of legal victories, the fights have not been easy or inexpensive.  In 2009, TiVo filed another patent infringement case against AT&T, and that lawsuit caused Microsoft to file its own infringement action against TiVo!  Then, earlier this year, a portion of the TiVo patents was potentially weakened by rulings in the U.S. Patent and Trademark Office.     

If you had a company that lost $20 million in its last quarter, would you want to be fighting simultaneous legal battles against Echostar and Dish Network and AT&T and Microsoft?  And what impact do you think that would have on your ability to compete effectively against Apple and Sony and Google and Netflix in bringing digital programming to the living rooms of the world?

Just to be clear, my purpose here is not to criticize Tom Rogers and his team.  I understand the importance of protecting intellectual property. (I counsel clients on that topic almost every day.)  Instead, I am pointing out the potential cost to a business when it focuses its resources on winning legal battles.  And I don't just mean its financial resources, but also its time, energy, human resources and the attention of senior management.

Echostar and Dish Network will probably be writing a big check to TiVo some day.  It might be as much as a billion dollars -- who knows?  And TiVo will then have a very healthy balance sheet and rightfully claim victory.   But where will its business be by that time?  If TiVo had viewed itself as a leader in consumer empowerment, and put more of its energy into further innovation of the consumer experience, it might still be leading Netflix, Apple and Google in the digital media business.  But that's not where it finds itself today.

A company's early strategic decisions are vitally important, and now more than ever, it is critical to focus on satisfying your customers.  Netflix decided early on that it was in the business of giving consumers the media experience that they want.  Apple is in the business of giving consumers experiences they don't even know they want until they get them!  Google is in the business of giving consumers access to all the information in the world.  

On the other hand, TiVo made that early decision (before Tom Rogers ever took over) to focus on the value of its intellectual property.  It now appears to be primarily in the business of protecting 10 year old technology that is becoming less relevant every day.  Given the choice, that's not a business I would choose to be in.  I don't think there is much of a future in it, no matter how many legal battles you win.

Wednesday, December 1, 2010

Netflix - Pushing The Red Envelope

There is a very good recent article in the NY Times discussing how Netflix gained its power, who is threatened by it and why.  On the one hand, the article feels a bit trite in that it looks at the recent offering of a streaming-only package as Netflix' "move onto the web."  However, in the body of the article, it becomes clear that digital distribution has been a part of the Netflix business for over a decade.

For me, the intriguing discussion is about how Netflix threatens the cable television business.  Again, this is a somewhat obvious point, but still worth making.  As online content migrates to the living room TV, it is clearly an alternative to cable.  That's not just Netflix, but Hulu and Vudu and Amazon and CinemaNow and Apple and GoogleTV and.....The point is that online media delivery to the television is making cable systems potentially obsolete, or at least less relevant.  (I covered this point in more detail a few weeks back in another post.)

Two points:  First, cable needs to change.  It needs to be as flexible as Netflix and find a fresh strategy that capitalizes on its unique qualities.  I'll give that some thought and perhaps comment on some possibilities in a future post.

The other interesting question is what Netflix can do to continue its cutting edge success.  Believe it or not, I think Netflix should be developing original short-form programming.  Netflix really is the next HBO, and HBO made its best move when it went beyond simply showing movies and developed its own cutting edge programming.  Netflix has an installed user base of 15 million households many of who actively use the online aspect of the service.  Neflix has a very good user interface and first-rate streaming technology.  It can best capitalize on all of these assets by offering some exclusive programs.

Reed Hastings has always viewed Netflix as a content distributor.  Well, every big distributor uses its distribution system to move some of its own content.  Netflix is a $10 billion company.  It is big enough to tackle that strategy and it should be doing that right now.  I renew my call for Netflix to re-enter the content business.  It is time to revive Red Envelope Entertainment and start making great episodic programs.

By the way, if you want to read a great discussion (and less optimistic view) of Netflix and the NYT article, check out this blog post from David Poland of Movie City News.  This guy really does his homework and makes some excellent observations.