Why Netflix Really may be the Future of TV

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If human history has shown one thing to be certain, it’s that deep down, humans are lazy.

Okay, let me put it in more positive terms:

We like to be efficient.

A quick peek back in history supports this.  Any development that allows for more work to be done with reduced human input has pretty much always been a smashing success.  A few examples:

  • The wheel: this simplest of machines, with its roots as far back as 3500 BC, empowered a single man to move what it took several to move before. 
  • Food preservation innovations, such as using salt, smoke, and acids like vinegar (pickling) to preserve foods, significantly reduced the need to forage or hunt year-round, improving human existence immeasurably-maybe even more than the wheel.  And it’s been around for at least as long. 
  • Domesticating animals gave access to food, clothing, shelter, and labor, and in many ways was the beginning of modern life, around 10,000 years ago.  Yep, a hundred centuries ago.  And you thought the Yankees had a lot of history!

Believe it or not, there’s a point to my rambling on about sheep and pickles.  And it’s this:  Eventually, it got to a point where our ancestors actually had free time on their hands, and began expanding on ways to entertain themselves and share ideas.  The next step, of course, was to make the technologies they used to entertain themselves even better!  You could even think of it as the evolution of the couch potato. 

Which, of course, leads us directly to Netflix (NASDAQ: NFLX).  Viola!

Okay, I’m skipping ahead a few millennia or so.  Let’s go back a few thousand years, and look at how the technology of entertainment has moved forward. 

-Stories around the campfire (spoken language)

-Cave drawings (written language)

-Greek Tragedy (again, I’m skipping a few civilizations that did it first.  Everyone can’t make the list.  Sorry.)

-Printing press (the birth of mass communication)

-Thomas Edison’s phonograph (not the first, but easily the best)

-The Little Tramp (i.e. “moving pictures”) -Talkies!

-AM radio (Jack Benny?  The Lone Ranger?  And is Johnny Depp really playing Tonto?  Wow.)

-Technicolor! 

-TV

-Color TV

-Recordable video, i.e. VHS, DVD, Blu Ray

-Pay per View & Video on Demand

 

As you can see, I am focusing on the kind of technology that has essentially evolved to encompass what we would now call “TV and movie entertainment,” and hopefully there is a thread that’s starting to become more apparent as you follow the bouncing ball.  As technology advanced, one of two things happened- either the quality of the entertainment experience was enhanced, or, and I would argue even more importantly, the ease of access was improved.  But either way, the prior dominant technology was either replaced, or at the very least significantly diminished.  Case(s) in point:

Once upon a time, going to a live performance (or putting it on yourself) was the only way to experience entertainment like storytelling or music.  And while it’s still a living form of entertainment, it’s a niche, and not very convenient.  Radio, which many would claim is an inferior product compared to a live play or band, was (and is) vastly more popular as a means of entertainment, and spent most of the first half of the 20th century as the country’s most dominant entertainment vehicle.  Not to mention that by the time the radio was in every living room, it was more convenient and cheaper to go see a “movie” than a play, except that there was no sound.  Well, until there was sound.  Those Hollywood folks were pretty creative, even back then! 

Then the TV came along and put a “talkie” in every living room, and the radio got pushed out the door-all the way to the car.  But at home, the addition of pictures made for a more entertaining experience.  (Or at least one that required less thinking.  Some people don’t know that there’s a difference…) It was like going to a movie without having to actually, you know, go to a movie.

But it was black and white, and that was kind of dull.  And there were still talkies, but why go out?  Technicolor!  So the inconvenience of leaving home was worth it to see Judy Garland’s ruby red slippers, even though they were diamond slippers in the book.  I guess diamond didn’t play too well in Technicolor. 

But the old black & white with the rabbit-ears lived on.  It was just too convenient, what with your pot roast and steel beer cans in the comfort of your own living room.  And that was good enough.  And then they added COLOR to the TV.  And how could it have possibly gotten better?

How, you ask?  Somebody figured out a way you could actually record something from the TV, and watch it when YOU wanted to.  And even that technology got better, as the TV’s & broadcasts got better, with DVD, Blu Ray, and now even 3D.  So combine that with a microwave dinner, and the pop-top aluminum beer can, and man had finally achieved living room perfection!  Right? 

Well, not quite. 

Fast-forward 3 decades, with the 64 inch 1080p 3D HDTV Blu Ray with Super Duper surround sound?  And, we haven’t even talked about sound improvements.

Dolby much?

So here’s the thing:  EVERY SINGLE ONE of these past technologies required one of two things:

1-You had to be at a specific place at a specific time.

Or

2-You had to physically have a copy of the recording with you, and the technology to play it back, with you. 

Two not-very-convenient things, right?  Well, here we are.  And that’s all changed.

Okay, so you still have to have access to the recording, and a device to play it back.  This is where it gets fun…

iPad?  Check.  No?  iPhone?  Check.  Really, no?  Android.  Ah, okay, that works, too.  Windows Phone?  All right, fine, that works too.  Just go download the app and you’re good to go. 

So guess what just happened? 

You just accessed the technology that almost COMPLETELY ALLOWS US TO CONSUME VIDEO ENTERTAINMENT AT OUR LEISURE! Totally consumer-demand driven. Totally efficient. No longer at the behest of the scheduling Gods, or room on the DVR, or beating the spouse to the remote.   Or carrying a few hundred bucks worth of DVD’s (and some way to play them) on vacation with you to keep the kids quiet. 

You may ask about the competitive landscape. Go ahead. Ask.

Well, since you asked, I'm not convinced that there is one, per say. Or at least not one that’s very different from any other industry. Competition happens. Heck, I would remind you that it tends to make things better. You know, that whole “driving innovation” thing.  

Sure, there are lots of companies with tons of cash on their balance sheets. But they are all pretty disciplined in what they do, and making a leap into something that's really outside of their core really doesn't make sense to me, or apparently them. It seems that someone would have already done so if it was as easy as some more “bearish” Fools think it to be. I would argue that in a lot of ways, it may actually be one of the more complicated businesses to just slip into…  But with that said, there are players, and they’ll all do well in streaming. 

Let’s take a look at the usual suspects, shall we?

​Apple (NASDAQ: AAPL)- benefits from a strong Netflix, as it drives users to its products. And if that show or movie isn't on Netflix, maybe you spend a few bucks and get it from the App Store or iTunes. They seem to be pretty clearly happy with the iTunes model of offering everything for a price, and letting the consumer buy what they want.

​Microsoft (NASDAQ: MSFT)- SmartGlass & Surface both make it pretty obvious that they want a bigger piece of the action.  They are massive enough that innovation will happen, even if it’s incidental. And that makes the marketplace better. 

Amazon (NASDAQ: AMZN)- Typically pointed to as the main reason Netflix will fail.  While prime changes the game, It’s not as much as one would think. Prime is a tool to drive incremental sales revenues. It's unreasonable, and irresponsible, to expect Amazon to even attempt to make Prime Streaming competitive with Netflix, when it also includes the shipping benefit, and it’s actually a few shekels less expensive. Amazon is in the business of making money, and Prime is, I say it again, a tool to add incremental sales. The less "good" streaming content that they include free within Prime, the more pay-per-stream content they will convert as incremental revenues.  It’s pretty simple, and subscribers can’t complain, since its “free” with Prime, which is really about shipping, right? I’m pretty sure that in my house, we try to buy more stuff from Amazon to make sure we “get our money’s worth” out of our Prime Membership. I don’t really try to watch as much Netflix content as I can just to get my 8 bucks a month out of the membership.  I just complain if what I want isn’t there, and then pay for it from AMZN or AAPL, depending on where I want to watch it. Isn’t it amazing how that works? Plus, since Netflix is a pretty big AWS customer, Amazon is already making some good money from the Netflix model, without having to deal with all the ancillary stuff, like content, web programming, etc…

Hulu- this is really just a complementary service, or "channel" to me, expanding to more current content.  Charlie Munger says he has nothing to add.

In summary, many people see the arrival of more and more streaming sources as a sign that competition is too stiff for Netflix to have a chance to be Netflix 2.0.  I see validation that consumer demand is driving a massive change. And the data is showing that adoption is happening very fast.

A billion hours in June?  That’s a clear signal that utilization is incredibly high, and that is positive, any way you slice it.  And utilization is very high for one simple reason: 

We are lazy. 

It requires less input, or effort, if you will, and gets better results that are on the viewers’ schedule, at their leisure.

I like that. Leisure, at my leisure!

Remember my question earlier about what’s better than watching 3D Blu-Ray in 1080p Dolby surround on the big TV?  It wasn’t rhetorical.  Here’s what’s better: 

Streaming it on my iPad at the beach.  And that's why I think NFLX is the future of TV.

 

My family joined a growing segment of society back in December, when as part of relocating for a job change, we made the decision to “Cut the Cable.”  This Deloitte survey, from this past January, shows that the trend is increasing...


elihpaudio owns shares of Apple, Amazon.com, and Netflix. The Motley Fool owns shares of Apple, Amazon.com, Microsoft, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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