A Business Technology Place

Would Netflix original content make it through your Shark Tank?

How is Netflix making money on their original content series?

Their latest release, Marco Polo, is reported to have cost $90 million for 10 episodes. At $7.99 a subscriber you can do the math for payback and ROI. But wait. This isn’t the first show Netflix has made costing tens of millions. The popular of House of Cards and Orange is the New Black head-up a rapidly expanding list of Netflix original content. At face value the strategy appears to be a money pit of immense proportions. I’ll admit that the business case was not immediately clear to me.netflix original

Matthew Ball provides an excellent economic review of Netflix original content for the Ivey Business Review. Reading Ball’s analysis you can start to feel Netflix’s business drivers of customer retention, third party licensing costs, and the ability to price subscriptions based on value received. Competition in streaming video services is increasing as more media outlets provide options for content. Netflix struggled with a price increase in the past. Even with the advancement of technology, availability of exclusive content, and increased hours of viewing it will be tough to have significant price increases in the future because competition is growing. Netflix appears to be positioning itself with premium content, but probably can’t afford to have premium prices.

Long term thinking.

Making business decisions for the long term is a good concept to debate. If you’re in a business school, chances are you’ll go long. If you’re in a strategic business meeting, chances are you’ll go short. I’ve experienced both settings. When you talk theory in business school everyone takes the side of keeping the company relevant for years to come. But in a real business, the conversation tends to gravitate towards the next quarterly earnings release, the stock price, the owners tax return, or how to not get sued tomorrow.

Yet, I see the massive cash investment from Netflix as a great example of long term thinking. The payback of the subscription based viewer model comes from attracting and retaining subscribers. Unlike cable TV which had the ability to essentially hold subscribers hostage for years based on the availability of content options, Netflix subscribers are free to go at any time. (Not to mention they don’t use term commitments!) But think about this. The number of traditional pay-for-tv subscribers has started to decline. There’s an oncoming avalanche of “cord cutters” and Netflix is positioning themselves to catch a large percentage of the money shift. They offer services for a fraction of the cost of cable TV and provide an increasing amount of content. All of it commercial-free.

The cost to borrow money is cheap right now. Ryan Bushey, of the Business Insider, points out that Netflix can borrow in the short term to make more on the investment for the long term. Controlling the price in the future is a smart bet. When is the last time the price of content from Hollywood studios went down?

My experience with Netflix original content.

I’m a Netflix subscriber. My first viewing of an original content series prompted this post because it made me think about the business economics as part of my experience. Plus the entire model of watching shows is different on Netflix.

The traditional TV series season lasts for months. Viewers wait a week between episodes. They watch commercials throughout the viewing. So in a 60 minute episode, a viewer may get 45 minutes of entertainment. Netflix releases the entire series of the original content at the same time. It’s Commercial free and available for binge-watching. It’s a different model and fits our instant gratification culture. Oh by the way, if you think about it, this all started with VCR and DVRs. We started recording shows to watch them when we wanted. We could skip commercials. We could watch episodes back-to-back.

My experience? In a word, satisfying. I like to watch content on-demand on my schedule. I don’t typically watch content during the work-week. But I may use content watching on the weekend as a time to “wind down” and relax. I like uninterrupted episodes that allow me to watch past an arbitrary stopping point that keeps me hooked for another week of waiting. The quality has to be there as well. I was satisfied with the plot develop development and level of acting in the series I chose to view.

So in a make-believe setting, would Netflix original content make it through the Shark Tank assuming it was a startup-up looking for seed money? Interesting question. Netflix original content is competing to take away viewers from Shark Tank. But the Sharks tend to like the risks that will pay them royalties month-over-month and that have a realistic chance of succeeding.  So imagine you’re a shark. The question is for you. Netflix is asking $7.99 a month with no monetary return. The return is in the form of exclusive original content. Are you in or out?

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Disclosure: I am a paying Netflix subscriber.

This is my 400th blog post on Merchantstand.com

I.T. is better when…

It’s Thanksgiving week and I’m thankful for another year of work and learning. During my reflection this year for what I’m thankful for, I thought about what makes life in IT better. What are those things that help IT perform to their best ability? What are those things that help an IT group provide great service?Make IT Better

So here’s a list you can gobble-up. It’s stuffed with good fillings. If you’re not in IT then give it to your IT guy/gal. Hopefully it won’t give them indigestion.

IT is better when:

  • employees focus on service and solutions over process and policy – This doesn’t mean we shouldn’t have policies and procedures. But as a matter of focus, IT is better when the goal of the employee is to provide service and solutions. For more discourse on this topic read What do you want to be known for?
  • employees move beyond thinking about salary as their primary motivator. I’ve heard my fair share of salary whining in a 25 year technology career. When that happens the employee loses focus on getting better, continuous learning, and service delivery. But more than that they lose focus on being happy at work.  It’s a distraction for them and those they involve. As a general statement, IT employees are well compensated. Salary isn’t a right-of position. IT employees are as responsible for delivering results as any other department.
  • the business units treat IT as a partner for solution development. So often I see business units skip IT to work with  an outside provider directly. It’s a complicated topic and yes IT is often too stacked-up with work to deliver services in the needed timeline. But this behavior often results from an attitude that IT can’t provide. If IT isn’t viewed as a legitimate business partner then they don’t even get a seat at the table to deliver solutions and services.
  • IT treats the business as a customer instead of an “user”. The term “user” is pretty impersonal. I’ve heard IT service delivery personnel talk about internal customers as if they are a nuisance or disruption to their day. Not cool. Those are customers and IT is better when they are they are treated like a customer. IT is definitely better when they focus on customer service. (Hint: this helps to create the atmosphere that solves the bullet above this one)
  • finance treats IT as a source for competitive advantage instead of a cost center. The cost center mentality is a race to zero. That’s not a winnable game for anyone. When finance sees and pushes IT to offer competitive advantages then IT gets better.  How do we return ROI on our technology investment? How do we charge-back some of cost to build services for customers?

Social commerce is gaining momentum

I love the idea of social commerce.
I’ve worked for years in and around eCommerce operations and expect to continue to do so for the remainder of my working days. eCommerce is an engine that drives revenue for a business while providing a touch point for customers to a brand and a set of products and services. The technology, platforms, and interaction styles will change over time. But with each change eCommerce blends into different variations of electronic commerce that center around marketing, media, and operations.The Social Commerce Blend

One such area that is starting, and I expect will grow as well, for retailers is social commerce. The big idea behind social commerce is to get consumers to collaborate while shopping online. The consumer becomes part of the eCommerce engine by helping with product creation, marketing, and even sales. All of this is the result of blending social media, digital media, and eCommerce.

In many ways the growing influence of social commerce for retailers is similar to the impact social media is having on the news media.  Media outlets are now using consumers to spread viewership to articles, videos, polls, etc. by sharing the links with their friends and family. Retailers will try to follow this trend by allowing consumers to be brand advocates, designers, and sales engines within their own spaces.

Would you buy a hip Converse shoe designed by your kids?
Paul Chaney of Social Commerce Today discusses a good example of all this with the article  Converse Facebook app for designing a Converse tennis shoe. The test is to allow the customer to design the tennis shoe and then open a store within Facebook to sell it to their friends.  Can’t you see this working with middle school aged kids where everyone wants to be the same and not stick out in the crowd? It also opens the door for thousands of more ideas and expands the reach of what the existing designers and sales group within the company could do.

Reality catalogs?
Another example is from online fashion retailer Zara called People!. The idea is to create your own look by posing with items from the Zara catalog and then submit your picture back to them. If the contributors photo is selected it is published online and the contributor is paid.  People like reality TV because it shows more everyday people in situations that might be real. I can see the catalog photos acting like this as well. Show me someone that looks like me rather than a fully staged model.

This is a healthy evolution of digital social media.
I realize brand advocates and referrals are not new to a marketing strategy for a business.  The difference here is the use of interactive digital media to scale the reach of the customer. In the past word-of-mouth referrals happened one-to-one based on conversations. With social media sites, the customer can get a message reach to hundreds/thousands of connections all at once.

Does this get us closer to answering the discourse about the ROI and financial contribution of social media? It certainly helps when there are activities that are trackable and revenue that is measurable. Expect more brands and marketers to try find the right combination of getting their customers to be a revenue producing connection with social media.

What do you think about the growth potential of social commerce?

Find me the money. Some practical thoughts on ROI.

Long before Jerry Maguire stated “show me the money” marketers have scrambled to show a return on investment, advertising, and marketing activities. But how well are marketers showing their stakeholders the money? It’s not a primary component of the marketing budget process according a survey review by Jack Neff of Ad Age. In fact, according to the survey, more CMOs rely on historical spending to set budgets than projected ROI.

But I don’t think that is necessarily a bad thing. A budget after all is just a plan for spending. The amount of spend required for services related to marketing is generally known by way of existing contracts, published price schedules, and yes historical spend.Geek and Poke ROI

So where does projected ROI fit into the budgeting equation? The answer is that the budget can be considered more than an exercise to control costs and plan to spend. It should also consider spend for *return as with capital projects.

Tracking and projecting returns on marketing efforts is not always easy and I’ll argue shouldn’t always be necessary. If the marketing activity is an ongoing event, then there should be some level of tracking available whether by electronic means or post sale surveys. Tracking helps forecast returns. New activities are more difficult because there is no baseline of activity from which to compare.

But digital and social media have muddied the waters on ROI calculations. In part because there is an abundance of data that can be measured and tracked and that creates noise to what is really important. But additionally because digital and social media create a web of consumer touch points that may lead up to a sale. Just how many times does a customer touch your marketing messages before they purchase? So analytics solution providers are increasing their ability to track Channel attribution as the technology creates more touch points before a sale.

So how does a marketer justify spend on activities for advertising, marketing, and engagement? First there needs to be an agreement that a component of marketing is trial and learning.  Sure marketers must eventually get to sound ROI and solid business decisions. But to get there requires some level of test and learn which could mean a negative ROI.

A typical marketing budget should contain three high level items: Advertising and Operations, Labor and Administration, and Trial and Measure (aka R&D).

Advertising in this case is for activities related to existing products and services. These activities are held to stricter standards for producing a return and marketers should use measurement tactics to justify the spend. It’s part of the run-the-business and go-to-market tactics used by the company to meet strategic goals.

Trial and Measure for the marketing department isn’t so much about the expense to develop new products and services for the company. That’s research and development (R&D) in the products area. Trial and measure allows marketers a chance to experiment, measure, learn, and adjust. It’s an important part of marketing and feeds larger money spend in the advertising area. It also helps to create forecast models for larger advertising investments. It’s the trial and measure area where marketers need a bit of freedom from all the pressures of ROI.

A great example of this is usability tests on eCommerce sites. Marketers can see big changes in key metrics by changing words, colors, or button locations on a web page. It requires programming time and thus an investment. But it’s usually these types of simple changes that find a respectable pay-off because they make purchasing easier for the customer.

Another example is merchandising techniques such as image location, image rotation, product reviews, etc. What works for Amazon may not work for everyone. It has to be tested with the specific products and services in the store.

So yes. Show me the money is a solid business principal. But let’s allow marketers to find the money first.

Why innovation must move beyond ROI

Innovation is a darling buzzword and I still see the term used frequently in my readings. But what’s really behind the word innovation? Why do some companies seem to get it while others don’t? Innovation is defined as doing something new or doing something that already exists in a new way. Established companies want to think of themselves as innovative and like to publicize that to the public and employees. Why wouldn’t they? After all, who wants to be thought of as stale, unimaginative, or not creative?

Roman Aqueduct

I wonder what the ROI case was for the aqueduct?

Yet business is about Return on Investment (ROI). People make a business to create some product or service in exchange for money. Investors don’t give money unless they feel confident they will see a return in excess of their investment.

That’s where innovation and ROI compete

Innovation is about trying something new, something unproven, or something to improve efficiency.  It is by nature risky. ROI is about minimizing or avoiding risk. It looks for sure returns and wants to stick to what is proven. In most head-to-head battles, ROI wins out, because its the logical business conclusion.

If ROI is the only measure to initiate work then innovation will die

Companies do cross this divide. Google search, the iPod, the microwave oven are common examples of innovations that transformed and shaped our culture.  Not all ideas for innovation produce the ROI that these creations have. However, for any successful innovative idea,  groups of people were willing to make a risky investment of time, talent, and money to produce it.

So how do we become innovative?

It takes a leap of faith to pursue innovative ideas. It’s hard hard to manage and is not completed in silos. It requires a complete shift in mindset and culture. It requires an acceptance for mistakes. Innovation must have a place where it trumps what’s known to succeed. Otherwise you’ll just repeat the same pattern of behaviors until you become irrelevant.

Innovation moves beyond ROI

Innovative ideas require thought and not all of them will work. Not all of them will produce a direct financial ROI. Therein lies the hidden beauty of innovation. Its returns can be measured in things like process efficiency, reduced cycle time, customer satisfaction, profits, and employee engagement. The returns of innovation are far reaching because it moves beyond rigid rules and boundaries.

How does your company promote innovative ideas?