Wednesday, June 07, 2006

Is Netflix a New Economy Firm?

David Leonhardt writes a thoughtful piece in today's New York Times, "What Netflix Could Teach Hollywood." Here's his brainteaser:

Its [The Conversation's] return from oblivion is a nice illustration of a brainteaser I have been giving my friends since I visited Netflix in Silicon Valley last month. Out of the 60,000 titles in Netflix's inventory, I ask, how many do you think are rented at least once on a typical day?

The most common answers have been around 1,000, which sounds reasonable enough. Americans tend to flock to the same small group of movies, just as they flock to the same candy bars and cars, right?

Well, the actual answer is 35,000 to 40,000. That's right: every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer.

"Americans' tastes are really broad," says Reed Hastings, Netflix's chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want — and helping to keep Hollywood profitable in the process.

It's a lesson we would do well to learn. We seem like a society that's being homogenized into one big McCity or McSuburb, but that may be more a function of the unimaginative media covering society than society itself.

Leonhardt continues:


Five million families now have Netflix accounts, and the company has basically reinvented the concept of a quick-turnaround mail-order business. It is, in short, one of the most impressive companies around. So why do so many people think it's doomed?
I don't think it's doomed, but nor do I think it is all that different from, say, L.L. Bean these days. You go to a website, you tell the website what you want, and the company sponsoring the website gives you what you want. You like what you get, so you get it again. L.L. Bean sells clothes not rental DVDs, doesn't do as much with the data collected on the website, and isn't based on quick turnaround. Are those the key differences that would make a company a "New Economy" company? Or is it just the amount of the firm's business that is done through the Internet relative to other means, leading to the following classifications:
  1. Old Economy: No important element of sales done through the Internet.
  2. 2006 Economy: An option to conduct sales through the Internet.
  3. New Economy: No option to conduct sales other than the Internet.
So your corner drug store is in #1, CVS (through CVS.com) is in #2 (as is L.L. Bean), and drugstore.com is in #3 (like Netlfix).

Read the article to the end. If you do, you get this gem from Reed Hastings:
"At the heart of any good investment, I tell investors, is a contrarian thesis that they and the company believe very deeply," Mr. Hastings said, "and that the rest of the world thinks is crazy."
Well said. This is what I like most about entrepreneurs.

2 comments:

Arun Khanna said...

Re: Out of the 60,000 titles in Netflix's inventory, I ask, how many do you think are rented at least once on a typical day? Well, the actual answer is 35,000 to 40,000. That's right: every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer.

It's not the number of titles but rather number of titles multiplied by number of DVD copies that comprises the inventory. It is reasonable to assume that current releases and popular movies at Netflix
have more DVD copies than others.

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