"There's a critical lesson to learn from the most recent changes in the media industry. ... while most have been distracted by the form, price, and user experience of their new digital products, a few companies have quietly overhauled the media business by focusing on something else entirely; instead of digitizing the product, these companies have digitized the customer relationship, creating a relationship that can survive the transition from traditional analog media to digital."
I was talking about Netflix, which in 2010 doubled its stock price from under $10 a share to over $20. It now hovers around $100. Back in 2010, I made it clear that this transition to relationships wasn't just about media companies, which were simply canaries in a digital coal mine:
A week ago, my family crowded around our living-room TV to watch the Macy’s Thanksgiving Day parade, and I couldn’t help thinking about the ironic clash between tradition and innovation: On the one hand, we mirrored that classic tableau of the family gathered around a single source of entertainment; on the other, our smart TV offered a distinctly modern viewing experience.
This fine balance between tradition and innovation is widespread — especially in regards to the evolution of TV media. Our Consumer Technographics® data shows that US consumers’ love for TV is unwavering, but the ways in which viewers access content are rapidly changing. Streaming services like Netflix and Amazon Prime have been catalysts for this change; now Comcast’s recently launched Stream TV opens a new avenue for TV consumption that lives somewhere between cable and Internet properties. With Stream TV, Comcast is targeting a growing group of TV lovers who don’t actually have a TV:
Title got your attention? It should. In a report I just published this week, I use our Forrester Consumer Technographics® data to identify the 7% of adults who are digital cord-nevers — measured as people who have never paid for TV and who are under age 32. This is the worrisome group whose arrival TV-industry pros have nervously anticipated. As we show in the report, they are officially now larger than the entire adult population of cord cutters, who come in at 6% of all adults. Put them together, and you have 15% of adults who are not paying for TV while still getting all the TV value they need from a combination of Netflix, Amazon Prime Video, and other tools.
Don't jump out of any Times Square windows just yet. TV is still massively popular and will continue to be. I wrote that report earlier this year, and Forrester clients can read it here. These defector groups are going to grow over time, true. And as the title of this post suggests, if we model this behavior out over the next 10 years, we expect that 50% of adults under age 32 will not pay for TV, at least not the way we think of it today. That compares to 35% of that age group that doesn't pay for TV today. (That's right, a third of them are already out of the pay TV game.)
The cloud is not just reshaping how companies provision technology; it's changing customers' experience. A technology platform that is easily scalable for and accessible to the billions of connected devices customers use — PCs, smartphones, tablets, TVs, cars, jet engines, and more — has allowed cloud-services companies to completely reinvent experiences. No one was using black-car drivers' idle time to disrupt the taxi industry on a mass scale prior to Uber. Millions of customers, both consumers and business clients, have flocked to these cloud services, believing these are better experiences. The proof? The cloud computing elder Amazon is a perennial leader in Forrester's Customer Experience Index and has a market capitalization of more than $200 billion. So, the question you're probably asking is, "Does this mean that we need to build our customer interaction points in the cloud?"
At Google I/O, the company managed to impress on a lot of fronts, enough that its stock began to climb as investors realized that Google is keeping up with — and in some cases, staying in front of — its digital platform competitors Apple, Facebook, and Microsoft. The new developer tools and resources announced will certainly lead to better apps, be developed more quickly, and be capable of generating more revenue. And consumer experiences in mobile, Google Maps, and the browser are about to get significantly more useful and elegant.
But one announcement debuted at I/O that doesn’t move the needle for Google — at least not as much as it could have — is the Google Play Music All Access pass. Despite the convoluted moniker, the service is straightforward: Pay $9.99 a month (in the US for now, more countries to come), and you’ll have unlimited access to a cloud-based music library with intuitive features that allow elegant discovery, consumption, and sharing of music.
If it sounds familiar, it’s because it is. The service can’t differentiate on its music library because the best it can do is license the same library that Spotify and Rdio already offer. All Access also creates playlists for you based on your music tastes as expressed by you directly or learned from your listening patterns and friends. That should also sound familiar because the same value is contained to various degrees in Pandora, iTunes, and Amazon Cloud Player.
Bottom line: Despite working really hard, the best that Google can do in music is to catch up to everybody else in the field. And that’s precisely what the company has done.
Last year Netflix attempted to shift its business strategy to focus mainly on streaming video. Although I wasn’t present in the boardroom discussions, it’s a reasonable bet that Reed Hastings and his team had decided the future was online streaming and that physical discs were a dinosaur. Since the war for content would be fought over streaming, Netflix would focus on adding value to its streaming customers and spin off the disc customers. On the surface this seemed to many a reasonable strategy, especially since Netflix reported that its digital streaming customers and the disc-in-the-mail customers were mostly not one and the same. So Netflix execs crunched the numbers and decided this was the right move for them. Perhaps they had hoped to spin off the disc side of the business to raise some capital. Whatever their thinking, their strategy choices left some gaping unanswered questions for observers like me:
All through the past decade, observers in industry and on Wall Street have offered reasons to discount Netflix’s efforts. Supposed obstacles ranged from Blockbuster to scant streaming options to recent rate hikes on DVD renters. When will these people ever learn? We understand why people cheer against disruptive players like Netflix — it would be nice if we could pretend all these digital disruptions will go away. But they won’t, and neither will Netflix. We’ve written about this in our latest report that people who keep an eye on content strategy will find valuable (see our newest report on Netflix).
But it’s not really written for them – it’s written for people who take an even bigger view, as do we. These people – today’s product strategists – know that Netflix is a powerful example of disruptive digital product strategy and are eager to learn how to act like Netflix in their own context and industry. In our report, we extract three specific lessons from Netflix:
Control the product experience. The company that controls the user’s total product experience will win, whether retailer, producer, distributor, or platform. That company will have ultimate control over what options people have, what prices they pay, and what value they believe they are getting. It’s a big responsibility, but it’s one that people charged with product strategy must be willing to accept. Makers of products as wide-ranging as sleeping pills, running shoes, and auto insurance should all follow Netflix’s lead and control the total product experience they deliver.
Netflix announced its Q3 2010 earnings a few weeks back and the numbers were every bit as positive as people have expected. The company added nearly 2 million subscribers in the quarter, almost four times as many subs as they added the same quarter last year. Yeah, four times as many. While Comcast and Time Warner announced net subscriber losses. At the same time, the cost for Netflix to acquire a customer has fallen 26% in the past year. Funny how when you digitize the customer relationship and the product at the same time, all your costs go down.
The number I always wait for from Netflix is the percent of subscribers that used Netflix Watch Instantly in the quarter. It rose to 66% this quarter, up from 64% last quarter. And remember, this was while adding 2 million new subscribers, which means that new subscribers are adopting Watch Instantly at a rapid rate instead of waiting to get used to Netflix; in fact, they're probably joining Netflix just to watch instantly. This is, of course, why Netflix will likely offer a digital-only plan that subscribers can pay for if they don't even want to pretend to put DVDs in their queue.
Why is this important today? Because it was just now that I finally dug through the summary financial results to find this gem of a quote, something that was briefly reported when Netflix announced it results, but was not fully understood in most of the reports I read. I want to resurface it because this is a big deal:
If Hulu were a dramatic figure, it would occupy a classic character role: the ingenue. The fair and unassuming ingenue naively enters a perilous circumstance with the best of intentions and soon finds that ruin awaits at every turn. The story typically plays out in one of two ways: Either the ingenue is sullied and descends to the level of the forces that surround her (think Grease), or a dashing hero enters to redeem the ingenue, removing the burdens her exposure to the world has caused (think just about everything else). These paths are both open to Hulu, and many observers are actively rooting for one or the other outcome.
There's a third, if rare, outcome: The ingenue evolves to become the hero, using guileless sincerity to overcome the evils of the world (think Pollyanna, a Hayley Mills classic). Nobody believes in Pollyannas anymore. Certainly not in the business world. But to succeed in its plans to build a paying customer base, Hulu has no other choice to but play the ingenue all the way to this third end.
It has only been a few weeks since Google announced it would create a brave, new world with its Google TV platform. In all the reactions and the commentary, I have been amazed at how little people understand what's really going on here. Let me summarize: Google TV is a bigger deal than you think. In fact, it is so big that I scrapped the blog post I drafted about it because only a full-length report (with supporting survey data) could adequately explain what Google TV has done and will do to the TV market. That report went live this week. Allow me to explain why the report was necessary.
Some have expressed surprise that Google would even care about TV in the first place. After all, Google takes nearly $7 billion dollars into its coffers each quarter from that little old search engine it sports, a run-rate of $27 billion a year. In fact, this has long been a problem Google faces -- its core business is so terribly profitable that it's hard to justify investing in its acquisitions and side projects which have zero hope of ever contributing meaningfully to the business (not unlike the problem at Microsoft where Windows 7 is Microsoft). So why would Google bother with the old TV in our living rooms?
Because TV matters in a way that nothing else does. Each year, the TV drives roughly $70 billion in advertising and an equal amount in cable and satellite fees, and another $25 billion in consumer electronics sales. Plus, viewers spend 4.5 hours a day with it -- which is, mind you, the equivalent of a full-time job in some socialist-leaning countries (I'll refrain from naming names).
Google's goal is to get into that marketplace, eventually appropriating a healthy chunk of the billions in advertising that flow to and through the TV today with such painful inefficiency.